Banks fulfil a special role in our society. They are the powerful pivot of worldwide investments. On this rests a major responsibility when it comes to making choices about where they make those investments. Globalisation and financialisation have given banks’ investment policies increasing influence over production chains, workers' rights and the environment, anywhere in the world. At the same time that process has increasingly obscured our view of just where our money is going.
By Arnold Merkies
In response to the credit crisis, a series of changes were put into play. Here, the focus lay on making the financial system more stable. All possible attention had to be paid to saving the banks, establishing rules and guidelines to limit risks, reorganizing supervision, and so on. This focus meant that reflecting on “sustainable banking” remained in the background.
Sustainable banking is still too often seen as something that can only be left to niche-players in the Dutch banking landscape, such as Triodos and ASN. In recent decades the Dutch banking sector has grown precipitously. A few extremely big players have survived. These players in particular could make a huge difference if they decided to make sustainable banking an integral part of their investment policy.
What is sustainable banking?
Sustainability is still far from being fully integrated into banks’ core business. In addition, banks’ sustainability policies vary hugely. In the Netherlands, only the niche players have opted on a structural basis for sustainable investments. Yet an understanding is growing that more than this is needed if we are to get a sustainable financial sector. Sustainability is a topic which concerns all banks.
What is sustainable banking and what does it include? Rens van Tilburg from the Sustainable Finance Lab defines it as ‘the financing of what from a social and ecological point of view is a sustainable economy.’ Sustainable banking therefore covers many aspects. Looked at through the prism of a ‘stakeholder approach’, in addition to the interests of the client and other stakeholders, the interests of society as a whole must be included in the picture. From this viewpoint, it is not only the client who is central, but also the entire society, a society which will in various ways experience the consequences of banks’ activities. Instead of ‘sustainable banking’, the term ‘socially responsible banking’ could be used. What this means is that financial institutions are critical in their investment policy, determining goals and preconditions from the standpoint of sustainability, and that they are open about communicating this to the outside world. In the provision of both equity and debt capital, sustainability criteria can be specified. Sustainability is therefore all about the social consequences of banking. This makes it a diverse topic, but it can be said in broad terms to cover the following:
- Workers’ rights This concerns the fundamental rights which apply to all employees. There are three leading criteria for these: good working conditions, good conditions of employment, and a guarantee of workers’ rights.
- Human rights Human rights are rights which everyone can claim. In broad terms this concerns rights and freedoms, amongst which can be counted civil rights, political rights (such as freedom of expression and equality before the law) and economic, social and cultural rights, which include the rights to food, work and education.
- Animal Welfare Sectors and organisations which deal with animals, such as fisheries, stock breeding, the pharmaceutical industry and the entertainment industry should treat animals with respect and give them the best possible living conditions.
- Arms The arms trade is very far from being transparent. Certainly when what is at issue are controversial weapons, it should be all hands to the pump to achieve a ban. The Netherlands took a step in the right direction when in 2013 it banned by law direct investment in the production and sale of cluster weapons. In addition to the production of controversial weapons, the trade in conventional arms with regimes which fail to respect human rights is problematic.
- Climate and Environment In a world in which natural resources are running out, CO2 emissions carry serious consequences for our climate, and nature is coming under increasing pressure, we must consider the impact which any investments may have. What effects do investments have on the climate and how can we guarantee a clean and safe environment for the future? How should we finance the transition to sustainable energy sources? What meaningful role are banks to play in the energy agreement? How can we prevent the loss of biodiversity in, for example, woods, wetlands and oceans?
- Tax avoidance A recent study showed that it’s banks that make tax avoidance possible. Nine Dutch banks have a total of 314 subsidiaries, joint ventures and branches in countries known to be tax havens. In many cases they were unable to explain why they were there.
What agreements exist which relate to sustainable banking?
A parliamentary commission recently called on the financial sector to develop a perspective on the future - including ‘social responsibility’ - and to embody this in a Banking Code of Conduct. The commission further recommended that financial institutions should be obliged to develop a plan for fulfilling their social responsibilities, including an explanation as to how they intend to express their concern for sustainable development in the social, ethical and environmental aspects of their operational management.
The Dutch government does not specify any rules relating to sustainable banking. Instead, they assume self-regulation in the sector, proposing a covenant to include agreements on such matters as transparency and sustainable investment. I welcome this proposal, but question the tardiness of its planned implementation. In the meantime, a number of relevant international guidelines do exist:
- The UN Global Compact and UN Guiding Principles
- The OECD Guidelines for Multi-national Enterprises
- Guidelines on Sustainability Reporting contained within the Global Reporting Initiative (GRI)
- The Equator Principles
- The Principles for Responsible Investment (PRI)
UN Global Compact and UN Guiding Principles
The UN Global Compact is an initiative for firms which have committed themselves to complying with certain principles relating to human rights, labour, the environment and the fight against corruption. These are complemented by the UN Guiding Principles, which are directed specifically at the first of these. Agreements under the Global Compact and the Guiding Principles have, however, no binding character.
The OECD guidelines for multinational enterprises are recommendations designed to give a stimulus to socially responsible undertakings. Forty-four countries have committed themselves to the task of encouraging their corporations to keep to these guidelines. With regard to financial institutions, the guidelines state that they have a responsibility to help prevent or reduce human rights violations. Banks are expected to call a corporation to account whenever it commits such a violation. Given that signing up to the guidelines is voluntary and that there are no monitoring mechanisms, it isn’t clear to what extent banks actually follow them.
Global Reporting Initiative
The GRI reporting framework provides guidelines for reporting on an organisation’s economic, environmental and social performance. The framework embraces both a general and a sector-specific section (including one relating to the financial sector) and consists of principles for determining the content and quality of the information dealt with in a report. The guidelines cover principles of reporting, instructions regarding reporting, and standard components of information provision, including performance indicators. No authority oversees the application of these standards.
The Equator Principles represent a standard for sustainability criteria used by banks in the distribution of project finance. Because this concerns only project finance, it affects no more than a small share of what banks do.
Principles for Responsible Investment
The PRI is an international network of 1,260 investors which is backed by the UN. Adhering to these Principles, however, is voluntary, and there is no institution which monitors their application.
In addition to all of these there are social organisations – NGOs – which look into the sustainability of banks and compare one to another on the basis of various criteria. In the Netherlands, there is the Eerlijke Bankwijzer (Fair Bank Guide), an initiative of a number of NGOs and the main trade union federation, the FNV. The Eerlijke Bankwijzer compares various aspects of sustainable or socially responsible banking. This initiative will shortly be broadened to include other countries.
Transparency in the financial sector
A year ago the Dutch Financial Stability Committee, on which the financial authorities DNB, AFM and the Ministry of Finance are represented, called for more transparency regarding risks. This was more than five years after the start of the credit crisis, a crisis partly caused by the lack of transparency. Moreover, this lack affects not only risks, but also the products and services offered, the valuation of assets, the ratings, benchmarks, taxes, price formation on the market, lobbying activities and, importantly, supervision itself.
A deposit holder who puts his or her money into the bank has no way of knowing where this money will be invested. Firms who treat their workers decently and respect human rights? The production of controversial weapons or the use of environmentally damaging production methods? Banks are less than forthcoming when it comes to the social effects of their activities.
This lack of transparency was confirmed by the Fair Bank Guide in 2013, which examined a number of banks and found that eleven of them did not offer sufficient openness. A study of tax avoidance, conducted by the same group a year later, also concluded that there was a lack of transparency.
Initiatives of the Financial Sector itself
Asked by the parliamentary enquiry into the financial crisis to come up with ideas for improving accountability in relation to policies on sustainability, and in response to popular demands for banks to give more information regarding their investments, the Netherlands Union of Banks (NVB) suggested a package of measures including a new Banking Code of Conduct and a social statute. The role of banks in relation to a sustainable economy is recognised, but the text in the social statute is so formulated as to allow them to retain maximum freedom. Instead of firm agreements on a proactive role for banks, ‘anticipating developments’ is discussed, in which banks might be able to play a role, but largely without obligations.
This brief account cannot go into every individual initiative coming from the banks. In the context of “best practices”, it is worth mentioning the recommendation of the Ministry of Finance that new initiatives be mapped out and the lessons which the sector as a whole might draw from these examined.
The cooperative Rabobank, in a strategy note entitled Samen Duurzaam Sterker (“Together Sustainably Stronger”), proposes that banks should enter into dialogue with their business clients to advise them about the sustainability of their firms’ practices and how these might be improved. A report would be published on the results of each of these consultations.
A number of banks have also subjected their own management practises to close scrutiny. The establishment of climate-neutral offices is an example of what this achieves, but it’s important that things don’t stop there. What is of real importance is that the core business of the banks themselves becomes sustainable.
Role of supervision
In its latest annual report DNB for the first time referred to ‘sustainability’ as part of its policies on supervision, and in particular to the further integration of sustainability into its core tasks. The national bank states its intention to look into whether ‘ESG risks’ (Environmental, Social and Governance risks) could be added to the risks which it already assesses.
Conclusion and recommendations for sustainability in the banking sector
Since the credit crisis the fact that banks’ policies have a major impact on society is clear. Over the years this influence has grown, giving the banks ever greater responsibility. A great deal is said about their involvement in financial stability and the extension of credit, but other social consequences of their policies remain underexposed in the social debate. It turns out that sustainable banks don’t underperform when compared to other banks, while the advantages for society of banks adopting sustainable policies are clear. Sustainability is therefore a theme which should concern all bankers.
Below are eleven proposals aimed at accelerating the process of moving banks in the direction of sustainability.
- Openness about investments Banks should be more open about the corporations and governments to which they make loans and with which they are involved. That openness about investments is possible is demonstrated by banks such as ASN and Triodos but also in other sectors, by, for instance, certain pension funds and insurers.
- Elaborating sustainable banking policy on a bank-by-bank basis. Banks should translate their sustainability policies into key performance indicators applying to the various areas on which they are reporting and for which they are accountable.
- Publishing a blacklist Banks should publish a blacklist of clients to whom they will no longer extend credit as a result of the latter’s involvement in human rights abuses or environmentally damaging activities. This is already the case amongst pension funds and insurance companies. Some banks – in the Netherlands, ABN-Amro and Rabobank - have already signalled their willingness to comply with this.
- Show results of dialogues on sustainability Banks should make public the results of dialogues conducted with firms in which they are investing. In how many cases have they done so with success? What was the result? Good examples can be found in this case too in the insurance and pensions sector.
Agreements in the Global Reporting Initiative regarding active ownership could serve here as a point of departure. In these banks are asked to state the number of firms with which they have spoken. In itself, however, this is insufficient; it’s also important to know what subjects were discussed, what guarantees have been put in place and what results the dialogues have delivered.
If, within the industry, standards of socially responsible entrepreneurship already exist, then banks can ask clients whether they recognise and maintain these.
- Information rights for deposit holders Deposit holders should have the right to information. The government should, in cooperation with the banks, establish a protocol confirming just what rights deposit holders have when it comes to being told about the way in which their savings are invested. As things stand this is a black box. Deposit holders don’t know, for example, how much of their money is invested in coal-fired power stations or the production of nuclear weapons, nor do they have any idea of the extent to which the firms in which their money is being loaned respect human rights or how they are dealing with the climate problematic.
For a well-functioning market, in which the deposit holder can make a considered choice of bank, complete provision of information is necessary, including effects on third parties. It isn’t a matter of making a choice between transparency and lack of transparency, but of transparency for the entire market as a basic precondition of the ability of consumers to make sound choices.
- Ensuring human rights Banks should have a responsibility in law to look into and form a judgement of how the firms in which they invest handle human rights.
The OECD guidelines for multinational corporations, in which it is stated that a bank must call a firm to account should it commit breaches of human rights, can serve as a point of departure in this matter. Signing up to these guidelines, however, is at the present times done on a voluntary basis. A legally-enforceable standard would put an end to this and make it possible to monitor compliance.
- Tackling tax avoidance Banks could make an important contribution to the prevention of tax avoidance. They could do this in the first place by setting a good example themselves and being completely open about their own tax payments per country. Above all, however, they should do their best to ensure that their clients do not ignore their social responsibilities in relation to fiscal obligations. Banks should refuse to provide finance, asset management or other bank services which may be used to conceal constructions whose purpose is simply to avoid taxes.
- Sector-wide dialogue on transition to sustainable energy sources As financiers, banks could play a crucial role in the transition to an economy based on sustainable energy. A coordinated approach is needed, under which the possible contribution of the state in supporting this process would be examined.
- Fiscal support for initiatives in the area of sustainability In the framework of the renewal of the system of taxation, how sustainability initiatives from within the sector can be encouraged by means of fiscal reform. Limiting tax relief on ‘green’ investments, as has been done in the Netherlands, has done the opposite, with the level of such investments falling from €7.4 billion in 2010 to €4.6 billion in 2013. What needs to be looked into is how new life could be given to this form of regulation and whether other social sustainability goals could be included.
- Role of supervisory agencies with regard to sustainable banking Now that the Dutch National Bank has included sustainability in its supervisory policy, the logical step would be for them to work out how this will be put into practice. The Bank has said that it intends to do this for each of the various aspects of the matter: “environmental, social and governance risks.” This should include a step-by-step plan, a timeline and quantifiable goals. Part of this should be the building up of expertise on the part of the supervisory agency in relation to sustainability.
- The government itself should set a good example The government could set a good example by itself putting demands on banks with which it does business. A motion has been passed in the Dutch Parliament requesting the government to work with a sustainable bank, while in June 2014 Parliament took the decision to look for the same, with which to conduct its own financial affairs. The government could also encourage this in its own agencies and in local and regional administrations.
Finally, as a shareholder in state holdings, the government has the opportunity to set sustainability criteria. The government is as things stand somewhat passive when compared to institutional investors. A more proactive role might be expected from a major shareholder, while this would also be in keeping with its policy of deploying its state holdings along market lines.
Arnold Merkies is a Member of Parliament for the SP and the party’s parliamentary spokesman on financial affairs. This article is translated and adapted from an ‘initiative note’ recently presented to Parliament.