Analysis: Has the time finally come for responsible banking?

The Principles for Responsible Banking are reaching critical mass

News that there are now 66 organisations in total – including 49 banks – endorsing the Principles for Responsible Banking shows how far the initiative has come in a short time.

This week 12 new banks endorsed the principles, which were developed by 28 leading global banks under the United Nations Environment Programme Finance Initiative (UNEP FI). The principles are out to consultation until May ahead of a signing in New York in September during the UN General Assembly. It’s hoped supporters will grow to 100 by that time.

The Principles are being presented as the first global framework to enable banks to integrate sustainability across all business areas, from strategic, to portfolio, to transaction level.

The six principles cover: Alignment; Impact; Clients and Customers; Stakeholders; Governance and Target Setting; and Transparency and Accountability.

They have caught the attention of top policymakers, with Valdis Dombrovskis, Vice President of the European Commission and a driving force of the European Union’s Action Plan on Sustainable Finance, saying banks have a “special responsibility that comes from being at the center of the financial system”. He is encouraging all banks to sign up to the principles.

It’s not sweetness and light though. Johan Frijns, director of BankTrack, told RI that the campaign group has not yet prepared its official response to the PRB consultation. But in November he said the draft principles – an initiative he welcomed – “appear to be developed somewhere in a windowless basement with broken clocks”. He said climate breakdown and other ecological catastrophes needed more than “lofty Principles, we need concrete and rapid commitments from all banks to abandon business sectors that contribute to climate breakdown and other ecological disasters”.

But some banks are getting down to the nitty-gritty. For example, RBS, the UK bank, says it is currently undertaking climate scenario analysis across its main lending portfolio.

Complementary to the UNEP FI work with commercial banks is the new central banks body, the Network for Greening the Financial System (NGFS). It seems this ultimately derives from Bank of England Governor Mark Carney’s pivotal ‘Tragedy of the Horizon’ speech in 2015 which for the first time focused central bankers onto climate change as a prudential risk. This theme was most recently picked up by the Governor of the Central Bank of Ireland Philip Lane (who is moving to the European Central Bank). Carney’s own comments at the tail end of last year suggest that UK banks are about to be required to perform climate stress tests as part of their regulatory obligations – the updated list of ‘exploratory scenarios’ should be released this spring.

As yet there are no US banks involved with the Principles for Responsible Banking and it’s also unlikely the Federal Reserve will join the NGFS any time soon.

Despite this, there are moves afoot in the States, such as a new initiative called Climate Safe Lending.

It’s headed up by Edward Kamonjoh, the former executive director of 50/50 Climate Project (now merged with Majority Action).The group’s goal is to make bank lending in North America and Europe carbon neutral by 2025.

Kamonjoh explains this would be achieved by aligning bank lending with the Paris Climate Agreement and working with banks on plans to draw down all financing for new fossil fuel development.

“Bank lending is the largest source of finance in the world and the life blood of fossil fuel projects,” said Kamonjoh in an interview with RI.

“So banks exert unprecedented influence over our capital markets and are responsible for the massive allocation of credit to fossil fuel development in the global economy. There’s been a great deal of focus on the role of equity markets in abating climate risks and contributing climate positive capital but the very critical role of debt, and bank lending in particular, in both exacerbating and solving the climate crisis and clean energy transition has largely been neglected. This is why we’re laser focused on bank lending as a strategic intervention.”

Most of the banks in the group’s network currently are European banks, which tend to be much further along with respect to incorporating climatic impacts in their business models than their US counterparts, noted Kamonjoh. The network includes Amalgamated Bank, ABN AMRO, Rabobank, RBS and Triodos Bank. Triodos, of course, has been doing this for a long time and this year represents the tenth anniversary of the Global Alliance for Bank on Values, which was co-founded by Triodos’ Peter Blom.

Amid all this, it is easy to forget the Equator Principles, the granddaddy of bank sustainability initiatives that launched as far back as 2003 – pre-dating the Principles for Responsible Investment. They are currently undergoing a strategic review with input from consultants Environmental Resources Management (ERM).

As a report by ERM acknowledges, the sustainable finance market is “evolving rapidly” with other finance bodies looking at environmental and social factors, including the Loan Market Association (LMA), the Association for Financial Markets in Europe (AFME) and the International Capital Market Association (ICMA).

This, the report says, creates potential opportunities for “strategic alignment and threat” with current/future Equator Principles “territory”.

This is taking place alongside a regular update of the principles (EP4 in the jargon), with recommendations for the signatories to show their commitment to the Paris Agreement and to be able to apply the relevant parts of the TCFD.

But the course of true bank sustainability never did run smooth and there will be those who will be wary that the Financial Stability Board, the body formerly chaired by Carney which incubated the TCFD, makes no mention of climate change in its 2019 work plan under new Chair — Randal Quarles of the Fed.

But there seems to be enough activity taking place across the board for us to be able to speak about the emergence of a responsible banking system. I hope such optimism can be justified.

With reporting by Paul Hodgson.