Sustainable Banking Scorecard · What long term value does a bank provide to ... Scorecard? A...

Sustainable Banking Scorecard Overview 2015

Global Alliance for Banking on Values – A short history

Year

2009 Independent network of sustainable banks founded with nine members and combined assets of nearly USD 12 billion

2010 Goal established of touching one billion lives with sustainable banking by 2020

2011 Plans created to find new sources of capital, develop human capital, and improve metrics on non-‐financial results

2012 Research issued comparing financial profiles of sustainable banks with Global SystemaFcally Important Financial InsFtuFons

2013 Berlin DeclaraFon, iniFaFon of investment vehicle to provide new sources of capital and development of Scorecard for assessing banking sustainability focus

2014 25 members with yearend 2013 assets of USD 77 billion and nearly USD 17 billion in funds under management -‐ now 28 members

The Principles of Sustainable Banking

Triple Bo*om Line central to business model

Transparent and inclusive governance

Long-‐‑term oriented and resilient to disruptions

Long-‐‑term client relations, understanding their activities

and risks

Grounded in communities, serving the real

economy All principles embedded in the bank’s

culture

The Business Case for Sustainable Banking Real Banking for the Real Economy: What long term value does a bank provide to stakeholders including society, clients and investors?

Four questions researched using financial information through year end 2013:

•  What support does a bank provide to the real economy?

•  How resilient is a bank in the face of economic challenges?

•  What returns does a bank provide to society, clients, and investors?

•  What growth does a bank deliver to expand its impact?

GABV Research: Real Economy

In October 2014 the GABV published updated research comparing Sustainability Focused Banks (SFBs) with the Global Systemically Important Financial Institutions (GSIFIs)

Exposure to real economy was estimated by ratios of Loans and Deposits to Total Assets

SFBs show substantially higher exposure to the Real Economy

Loans / Total Assets 2013 2008 2003

SFBs 76.2% 76.0% 77.1%

GSIFIs 40.5% 38.8% 43.4%

Deposits/Assets 2013 2008 2003

SFBs 80.4% 71.5% 71.4%

GSIFIs 48.8% 42.0% 47.3%

GABV Research: Capital Strength

SFBs maintain high capital positions in terms of Equity to Total Assets

GSIFIs outperform SFBs in the Tier 1 Ratio in 2013 but the ratio of RWAs to Total Assets highlights the impact of non-transparent RWA models on this capital ratio

Equity / Total Assets 2013 2008 2003

SFBs 7.7% 7.3% 6.2%

GSIFIs 6.6% 5.0% 5.2%

Tier 1 Ratio 2013 2008 2003

SFBs 12.4% 11.6% n/m

GSIFIs 13.3% 10.1% n/m

RWA / Total Assets 2013 2008 2003

SFBs 60.9% 60.5% n/m

GSIFIs 39.8% 41.0% n/m

GABV Research: Real Returns

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

RoA

Sustainable Banks GSIFIs

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

RoE

Sustainable Banks GSIFIs

Financial returns for SFBs are attractive, especially considering their higher level of Equity to Total Assets:

Ø  Starting in the crisis year of 2008 SFBs consistently outperform GSIFIs in RoA while delivering slightly higher levels of RoE

Ø  SFBs show much lower levels of volatility in their returns

GABV Research: Growth

SFBs show much higher growth in key operational activities, especially in the post-crisis period when compared to GSIFIs.

Total Loans From 2003 From 2009

SFBs 9.3% 13.2%

GSIFIs 8.3% 3.8%

Total Deposits From 2003 From 2009

SFBs 10.4% 15.3%

GSIFIs 9.4% 4.9%

Total Income From 2003 From 2009

SFBs 6.4% 8.5%

GSIFIs 6.4% 6.5%

Why is GABV developing a Scorecard? A structured approach based on the Principles of Sustainable Banking and developed with practitioner knowledge and experience for:

Addressing the Berlin Declaration goals

Structured reporting on sustainability to stakeholders by banking institutions

Assessing of banks for GABV membership

Assessing of banks for investments by Sustainable | Finance | Real Economy

Self-assessment tool by banks with a sustainable banking agenda

Sustainability Banking Scorecard: The Structure

Sustainability Score Basic

Requirements Quantitative

Factors Qualitative Elements

•  Regulated Banking Institution

•  Sustainability Mission •  Transparency

•  Financial Viability •  Real Economy Focus •  Triple Bottom Line Focus

•  Strategic Direction •  Implementation •  Identifiable Results

STOP Base Sustainability Score

Sustainability Score Calibration GO

Sustainability Score

100 90 80 70 60 50 40 30 20 10 0

Established : Financial institutions that already demonstrate, through their business models, internal practices and results, an authentic and thorough commitment to embedding sustainability into their banking model to meet the needs of their communities.

Sustainability Score

Engaged: Financial institutions whose leadership has embraced the sustainability-focused banking model and have made concentrated efforts to steer the organization in this direction, though its products and internal practices lack full realisation.

Emerging: Financial institutions whose management is convinced of the power of a sustainability focused banking model and has the sincere intention and initial actions for steering its institution towards the adoption of sustainability-focused banking products and services.

STOP

Regulated Banking Institution Statement regarding regulatory framework and status and evidence of client deposit and lending relationships

Mission Statement Institution’s mission statement has elements related to at least one of the Principles of Sustainable Banking

Reporting Transparency Evidence of transparency of reporting to all stakeholders, especially relative to sustainability commitments

GO

Basic Requirements

Quantitative Factors

Qualitative Elements

Basic Requirements

Quantitative Factors: Overview

The Quantitative Factors provide insight into three elements – Financial Viability, Real Economy Focus and Triple Bottom Line Focus – addressed in the Principles

A variety of Quantitative Factors are measured with a focus on using existing financial reporting information supplemented by management accounting elements. Management accounting reporting allows for more transparency and consistency.

Financial Viability

35%

Real Economy

Focus 25%

Triple Bottom Line Focus

40%

ROA 10%

E/A 10%

AQR 5%

D/A 10%

REA 15% RER

10%

TBLA 40%

Quantitative Factors: Base Sustainability Score

Metric Weight Minimum Benchmark

1. Return on Assets (RoA) – 3 year average 10 0% Market

2. Equity to Total Assets (E/A) 10 3% 8%

3. Asset Quality Ratio (AQR) 5 0% Market

4. Client Funding to Total Assets (CFA) 10 30% 75%

6. Real Economy Assets to Total Assets (REA) 15 30% 65%

5. Real Economy Revenues to Total Revenues (RER) 10 50% 75%

7. Triple Bottom Line Assets to Total Assets (TBLA) 40 10% 55%

Basic Requirements



Quantitative Factors: Real/Financial Economy Concepts

A concept developed for practical decisions on how to distinguish between a Real Economy Asset and a Financial Economy Asset

The core banking activity is intermediating between providers and users of capital by managing Money at Risk Exposures

Classifying Real Economy Assets and Financial Economy Assets is crucial to determine the allocation of Money at Risk by a bank, and thereby to reveal its business model focus

The allocation of Money at Risk across the Real Economy and the Financial Economy, and within those categories, to Triple Bottom Line activities, reflects priorities and focus of a bank business model, and hence its sustainability focus

Managing Money at Risk Exposures: A Three Dimensional View

On Balance Sheet

RE FE

Off Balance Sheet

In assessing the allocation by a banking institution of its Money at Risk Exposures, there are three independent dimensions to consider:

1)  On or Off Balance Sheet 2)  Financial Economy or Real Economy 3)  Triple Bottom Line or Non-Triple Bottom Line

Non-TBL

TBL

Financial instruments should be classified as Real Economy if they are no more than one degree from a Real Economy Asset or Activity. A specific type of financial instrument could be in different categories depending on its actual use by the banking institution.

Real/Financial Economy Guidelines Degrees of Separation Concept

Real Asset/ Activity

One degree

Two degrees

Three degrees

Four degrees

Real Economy Financial Economy

Financial instruments with fewer degrees of separation from the Real Economy demonstrate Transparency and closer Client Partnerships

Transparency

Client Partnerships

People: social empowerment

Planet: environmental regeneration Prosperity: economic resiliency

Triple Bottom Line Activities: Categories to Consider

Education, health care, social inclusion, arts and culture, or special needs housing

Renewable energy, energy efficiency or retrofits, green-oriented housing or buildings, waste or pollution reduction, water efficiency and access, or sustainable agriculture

MSME lending, micro-finance for micro-enterprises, or economic inclusion

Money at Risk may meet more than one of these Triple Bottom Lines

Real/Financial Economy Dimension Triple Bottom Line – Examples

Real Asset

One degree

Two degrees

Three degrees

Four degrees

•  Loan to finance energy retrofit •  Loan to food manufacturer •  FX forward contract for clothing

exporter

•  Alternative energy equity stake •  Direct financing leveraged buyout •  Real-estate fund with direct

investments in property

•  Shares purchased in secondary market for SRI fund

•  Liquidity deposit with other banks •  Loan to hedge fund for buyout

•  Hedge of client FX positions with other banks

•  Mortgage backed securities for low income housing

•  Tranche of a Collateralised Debt Obligation for commercial loans

•  Specific maturity tranche of mortgage backed securities •  Credit default swap

•  Local medical clinic •  Organic farm •  Clothing manufacturer

•  Energy-efficient office building •  Coal energy plant •  Housing for seniors

Real E

conomy

Financial Econom

y TBL

Non

-TB

L To

be

asse

ssed

Qualitative Elements: Structure – Scorecard 2014

Guiding Key Points Examples to be included in reporting to enhance consistency

Leadership

Organizational Structure

Products & Services

Management Systems

Human Resource Tools

Performance Reporting

•  Publicly available reports •  Internal performance

tracking and reporting


QE1

QE2

QE3

QE4

QE5

QE6

Qualitative Elements: Show the Flow

QE1

QE2

QE3

QE4

QE5

QE6

High Level Direction

Implementation and Processes

Identifiable Results Why?

How?

What?

A holistic Flow from High Level Direction to Identifiable Results is required to provide grounding to support the banking institution’s commitment to the Principles of Sustainable Banking

Qualitative Elements: Calibrating Base Sustainability Score

Example: Policy: Bank X only finances enterprises that benefit people, the environment and culture. All strategic and policy efforts, regardless of the specific discipline within the bank, reflect this focus. Implementation: New products are developed with sustainability integrated in them – from new lending products to apps which connect savers with borrowers Result: Bank X to lends exclusively in sustainable sectors: Environment (x%), Social (x%) and Culture (x%)

Basic Requirements



Structure:

UPDATE FOR NEW

Strategic Direction Implementation Identifiable Results

Leadership

Organisational Structure

Products & Services

Management Systems

Human Resource Tools


Qualitative Elements: Examples

Strategic Direc+on Implementa+on Iden+fiable Results

Performance Reporting Bank will be transparent in reporting on its activities

All lending clients requested to allow publication of

financing

Detailed information on 95% of all loan clients available on

bank website

Products & Services Bank is committed to

financing only sustainable clients

All clients to be assessed using a standard tool relative

to client sustainability

40% of clients have top sustainability assessment

and only 10% of clients had an inadequate sustainability

assessment

Human Resources Tool Bank is committed to relative equality of compensation

Human Resources to ensure that ratio of highest to lowest

pay is relatively equal

Ratio of Top 10% compensated staff to Lowest

10% was 2.3

Management Systems Bank will be compliant with the Equator Principles

Credit approvals for project finance require explicit review relative to Equator Principles

Loans declined for 15 projects due to lack of

compliance. 10 projects restructured to comply with

Equator Principles

Sustainable | Finance | Real Economy: “SFRE” or “Sapphire”

A Luxembourg domiciled investment vehicle to support Sustainability- focused Financial Institutions (SFIs)

Principles of Sustainable Banking used as a benchmark for investment decisions and monitoring

The GABV Sustainable Banking Scorecard used as a measurement tool

Investments targeted at Tier 1, Tier 2 equity and subordinated debt positions in SFIs, both GABV and non-GABV

Ambition to deploy USD 1 billion in its first 10 years to support growth of the SFI segment with initial closing of USD 40 million in February 2015

Sapphire investments expected to be leverage 10 times into Real Economy lending of which 6 times expected to be focused on Triple Bottom Line lending

Advocacy/Values-based Banking Day

•  GABV events and social media engagement: activating a % of 30,000 co-workers, plus clients, and partners

•  Significant social media activity using the hashtag #BankingOnValues •  7500+ public posts •  8.8 million impressions •  Supported by CEO selfie photos!

•  Media attention in 6 countries surrounding values-based banking and #BankingOnValues

•  Creation of a suite of consistent, branded messages and collateral •  Activation of a new network of GABV Marketing and

Communications experts •  Valuable insights into the importance of language localisation and

how it impacts campaign adoption and engagement

23 October 2014 marked a very successful first international awareness campaign of the GABV : #BankingOnValues

Leadership Academy/MOOC

Text to come

•  18-month programme organized in 4 modules hosted by member banks and the MIT

•  Targeted at professionals with three to five years experience at executive, mid-management and project management levels

•  Gather the next generation of leaders from member banks (and from other like-minded organizations) to: •  learn together from experts and senior executives about leadership,

innovation techniques and trends in values-based banking •  share their knowledge and experiences •  expand their network

•  The GABV also collaborates with Co-Lab at MIT to develop a free MOOC on values-based banking

In March 2015, GABV launched the first prototype of its Leadership Academy with 19 highly qualified participants, representing GABV member banks from 5 continents

Global Alliance for Banking on Values

www.gabv.org

David Korslund [email protected]

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