SANDS will address certain aspects of sustainability in a series of short briefings and newsletters. In this briefing we give you an overview of the Principles for Responsible Banking (the "Principles”) being launched at the UN General Assembly in New York on 22 - 23 September 2019.
Authors: Ylva Cornelia Axelsen, Partner at SANDS
Sonja Lorentzen, Associate at SANDS
Who are behind the Principles?
The Principles have been designed by a group of 30 leading banks together with the UN Environment Programme’s Finance Initiative (“UNEP FI”), and were finalised in July 2019. Founding Banks include (amongst others) Barclays, BNP Paribas, Citi, Nordea, Santander, ING and ICBC (see footnote1).
What are the Principles?
The Principles for Responsible Banking have clear similarities to the Principles for Responsible Investment already being used to incorporate ESG criteria into institutional investment operations.
Signatory banks to the Principles commit to the following ambitions:
To align its business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the UN Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks.
2. Impact & Target Setting
To continuously increase the bank’s positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from the bank’s activities, products and services. To this end, the bank will set and publish targets where the bank can have the most significant impact.
3. Clients & Customers
To work responsibly with its clients and customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.
To proactively and responsibly consult, engage and partner with relevant stakeholders to achieve society’s goals.
5. Governance & Culture
To implement its commitment to these Principles through effective governance and a culture of responsible banking.
6. Transparency & Accountability
To periodically review its individual and collective implementation of these Principles and be transparent about and accountable for its positive and negative impacts and its contribution to society’s goals.
Supporting documents to the Principles have also been released, hereunder:
- The Key Steps to be Implemented by Signatories; and
- The Reporting and Self-Assessment Template.
What is the purpose of the Principles?
The purpose of the Principles is to align the bank’s business on a strategic, portfolio and transactional level with society’s goals. This includes defining a bank’s role and responsibility in this context, and the identification and management of associated risks. Instead of solely considering the impact of external influences on the bank’s portfolio, banks must also consider what impact their portfolio has on society. Commitment to the Principles will therefore contribute to moving sustainability to the core business of a bank.
How are banks to implement the Principles?
The supporting documents set out three key steps to effectively implement the Principles:
- Impact analysis;
- Target setting and implementation; and
These steps are coupled with specific requirements in respect of
- the number and quality of the targets, which includes (but is not limited to)
- a minimum of two targets,
- alignment with and contribution to the UN Sustainable Development Goals and the Paris Climate Agreement,
- the targets being specific, measurable, achievable, relevant and time-bound (SMART);
- the measuring and monitoring of progress;
- the targets being tied to milestones and actions to meet them being implemented.
How will bank demonstrate compliance?
To demonstrate compliance a signatory bank must:
- Within 18 months, publish its first reporting and self-assessment on the Principles (and annually thereafter, in line with the signatory bank’s annual reporting cycle).
- Within four years, have fully implemented the steps outlined in “Key Steps to be Implemented by Signatories” concerning impact analysis, target setting and implementation, and accountability.
What are banks actually doing to follow the Principles?
The following are selected examples of what some signatory banks are doing to follow the Principles:
- Citi has, as the first major U.S. bank, released a climate disclosure report in response to recommendations from the Task Force on Climate-related Financial Disclosures (see footnote 2).
- BNP Paribas, ranked 4th in Europe on Dow Jones Sustainability Indices with an 100/100 environmental score, has an internal network of close to 300 Corporate and Social Responsibility experts working with environmental issues, socially responsible investments, financing and investment policies and microfinance. Under their Group Sustainability and Incentive Scheme, 20% of 6,750 key employees’ deferred variable compensation relies on the performance of 8 specified CSR performance indicators (see footnote 3).
- ING is increasing lending to automakers producing more electric vehicles than those with traditional engines (see footnote 4).
A number of major banks are not signatories to the Principles, but have their own sustainability programs. As examples:
- JP Morgan Chase has a target of providing USD200bn in clean financing by 2025, and has by 2018 reached USD 100 bn. The bank has also installed 2,570 solar panels at 23 of their buildings as part of their target to use 100% renewable energy for its global power needs by 2020.
- HSBC has integrated climate risk into their annual credit risk assessment as part of their strategy to reduce its exposure to thermal coal and other high carbon sectors, and have implemented training programmes and related score card and remuneration models for management and employees (see footnote 5).
Are the Principles relevant for others?
To the extent the signatory banks enact on their commitments under the Principles, they may have effect on a number of levels, including
- signatory banks’ customers and counterparties in the financing market, due to the Principles’ focus on encouraging sustainable practices and signatory banks’ commitment to decrease negative impacts;
- The wider banking industry, as the Principles will have the potential to form market practice and guide the transformation of banks’ behaviour;
- Relevant regulators or policy makers where their expectations towards a bank’s responsibilities are concerned; and
- Society as such, as the Principles are designed to enable achievements in line with society’s goals
Who can commit to or endorse the Principles?
Apart from existing signatory banks, any other bank which executes the Principles Signature Document and is granted membership in UNEP FI (upon application) may become a signatory bank. Non-bank financial institutions may become endorsers of the Principles, and current endorsers include (amongst others) European Financial Congress, UK Finance, Finance Norway and Chartered Banker (see footnote 6).
What if a Signatory bank does not follow the Principles?
Should a signatory bank not comply with the requirements, this may result in the removal from listed signatories. Committing to the Principles will therefore allow a signatory bank to join a community committed to the same values, but with repercussions and related reputational risk for a signatory bank which does not actively conduct its business in line with the Principles.
Did you know?
The Principles for Responsible Banking is one of many private initiatives for environmental, social and governance related positive change. Below is a (non-exhaustive) list of other key initiatives that have impacted the financial industry: