Home Banking New Age Banking – Sustainable Finance Gathers Momentum

New Age Banking – Sustainable Finance Gathers Momentum

by internationalbanker

By Alexander Jones – alexander.jones@internationalbanker.com

The combination of the 2008 financial crisis with the deluge of scandals and related crises in the banking industry over the last few years has led to an industry-wide call for change and restructuring fuelled by growth of mistrust. Confidence in the banking industry has been shaken to the core and an increasing number of people are actively seeking alternative finance and banking service avenues. The market has shown a significant shift in demand towards services offering positive social and environmental benefits. Additionally, banks focused on benefitting the local economy, operating under alternative business models and priorities and member-owned banks are growing in popularity with consumers. 

Consensus has developed in the industry about setting transparency, diversification and sustainability at the core of the future banking system. Many alternative institutions have been spawned out of this growing demand and have been set up with these three core values embedded into their operational foundations. There is a feeling that mainstream banking has failed people across the globe, from the consumer to the institutional level. In particular there has been an outcry from consumers looking for reform after having been directly subjected to unethical and irresponsible banking behaviour and the painful consequences. 

New age investors, who are full of hope for change, are driving transparency forward by requesting comprehensive reporting services as part of their well-meaning investments. The attitudes of these new age investors have shifted towards wanting more than monetary returns on their money. The majority of the current generation believe businesses, especially financial businesses, can more effort towards addressing a number of the world’s biggest problems. Examples of popular causes include climate change and clean energy as well as resource scarcity, education, housing and community development, which have previously been starved of capital.  

Investing and banking activity is being shaped by generational shifts in capital, manpower and attitudes. Today investors plan investments with a fundamentally different approach as they look to create impact from their money as well as good returns. Investors seeking both purpose and profits from their capital are growing in number across the spectrum — with demand growing at a quickening rate for both institutional and retail investors of all sizes. Clean-energy projects have been an especially popular choice, with protecting the environment at the heart of the movement. In particular, funding is moving in droves towards energy enterprises based on clean-technology research and development. 

The primary driver in sustainable finance has been investment in smarter, transparent business models — those that generate positive social or environmental impacts. Investors are choosing more often to invest in ventures structurally designed for sustainable purpose and wider social impact. Funds and capital are moving and seeking asset classes based on sustainable models of investing and facilitated through ethical and transparent distribution channels. New lending methods have rapidly developed through technological advancement, such as the boom in peer-to-peer lending. Technology has been the linchpin to growth in sustainable investment-product provision and it is the combination of technology and socially responsible attitudes that has enabled the new age of sustainable banking to flourish. 

Financial technology is currently a very popular investment area for this new generation of responsible investors. With the explosion of online, virtual currencies such as Bitcoin and the creation of innovative alternative payment mechanisms, the population at large is looking to revolutionise the control mechanisms of finance and is harnessing the technological tools to do so. This innovation will help drive sustainable finance forward. Further to this, the Internet has allowed innovative activity hubs to develop worldwide and outside of the traditional geographic banking centres of New York, London and Hong Kong. The financial innovation in countries such as South Africa, Brazil, China and Nigeria is building a new structure of financial transacting and observers are keenly watching as financial-service problems are being solved creatively and sustainably within these countries. 

Examples of the leading alternative banking service providers for both individual and business needs include Triodos, Charity Bank, Unity Trust Bank, Ecology Building Society and Handelsbanken. These institutions have been founded on sustainable financial principles, meaning that banking services and funds will be utilised towards generating positive and lasting change with full operational transparency. The priorities of these firms are typically profit, people and planet in equal measure. Companies, enterprises and projects deemed as creating cultural value and benefitting people and the environment are provided with the vital capital they need, as investor and saver money is channelled towards these endeavours in exchange for a stable positive return. 

Today, stakeholders expect to see proof that their funds are being invested responsibly. Investors want to be provided with evidence and assurances that their money is going to ethical and responsible enterprises. The term “impact investing” is growing in use and refers to this new movement of philanthropic use of capital and assets. Asset managers in this area drive funds into areas based on sustainable investment strategies. These strategies are built on the three tenets of diversification, transparency and sustainability and place a social conscience at the forefront of all investments and deals made. Investment is focused on investing in enterprises, trusts and organisations, which have the goal of creating positive social and environmentally favourable outcomes, all the while creating a positive and consistent return on investment. The investment process has evolved across every asset class towards prioritising a focus on the environment, the social and community footprint, and the principles of ethical corporate governance. Currently there are three main drivers of investors and asset managers adopting this impact-investing strategy: the ability to measure and report on tangible social and environmental impacts, shifts in stakeholder mentality and an improved risk-reward ratio on funds invested. 

Sustainable financial methods offer and require by very definition the measurement and reporting of the social and environmental benefit of every investment. With reporting standards now in place and in practice such as COS 3000, Equator Principle, GIIN, IRIS and UN PRI, creating and measuring real, tangible value has been made a primary concern for all involved in such transactions. Furthermore, shareholders and other stakeholders have had a shift in mentality and now demand that principles of sustainability and responsible behaviour are incorporated into core business strategy. Finance facilitators and asset managers have responded to this increasing demand and are driving sustainable finance forward. More than ever it is critical that values are aligned between involved parties. Providing evidence of responsible business activity is increasingly becoming fundamental to establishing, maintaining and growing fruitful commercial relationships. In addition to directly involved parties, NGOs, regulators and high-level industry bodies are also showing growing interest. Finally, financial return is understandably the cornerstone of the banking industry; of course, risk-weighted returns are a priority for all investors and sustainable banking mitigates a lot of the risks previously lurking from unethical actions and decision-making. 

Good governance is key to sustainable banking. Revelations of financial scandals based on unethical behaviours of major banking professionals worldwide have been the focus of media headlines for the last five years. Sizeable banker bonuses have also been the subject of prominent media attention and scrutiny. In light of these announcements, a call for ethical banking is being made louder than ever by people from all walks of life. Consequently, financial decision-making based on ethical principles is increasingly being institutionalised and becoming the norm. Efforts to increase accountability and transparency are already being implemented. Examples of measures include integrated-reporting frameworks, more restrictive listing rules and improved regulatory supervision. Although there is still much to be done, these changes are slowly improving confidence in the banking industry and gradually rebuilding trust in financial services. 

A further concern of sustainable finance advocates is diversity on all levels, in particular employment equality. Women in finance have seen strong encouragement from the appointment of Janet Yellen as the first female head of the Federal Reserve and Christine Lagarde at the helm of the International Monetary Fund, but there is still some work to do to redress the imbalances across the industry, with women making up only 2.7 percent of chief executives in the US financial industry as of the end of 2013. There are still some barriers to break down. 

The banking system to date has been dominated by several large, traditionally structured banks. By harnessing the tools available from the traditional banking system in combination with new age innovation and attitudes, the shift towards sustainable banking will grow stronger. The key to a prosperous, long-term-focused economy will be diversification, transparency and sustainability. Momentum in sustainable banking has been gathering pace through 2013 and looks set to grow at a quickening rate through 2014. 


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