Before we delve into this topic, let's first put any doubts to rest. You might be wondering: what exactly are 'socially responsible' banks? Are they different from 'regular' banks? Not exactly, but this term is used for banks offering products and services related to the environmental, social, and governance (ESG) principles.
For example, a socially responsible bank might want to invest in a solar power project.
Most people's choices are aligned to their personal beliefs, which also cater to social issues. Switching to ethical banking is one such choice. Socially responsible banking is a great way of keeping both your money and values systems aligned, while making a positive social impact. Such kind of banking encourages transparency and helps build strong communities.
At the start of 2018, $11.6 trillion of all professionally managed assets—one $1 of every $4 invested in the US—went under ESG investment strategies, a sharp increase from 2010 (approx. $3 trillion overall).
Are we expecting an increase in socially responsible investments in the times to come? Let's find out and learn more about it.
What is socially responsible banking?
A socially responsible bank considers social and environmental impacts when making lending and investment decisions. Like any other financial institution, these banks also seek to generate profit from their operations. But unlike most others, these banks always emphasize on ethical practices. They strive to generate earnings without sacrificing principles or harming the environment.
The phrases "ethical banking" and "sustainable banking" are interchangeable with social banking.
Why is socially responsible or sustainable banking gaining traction?
While socially responsible banking is not new, it is driving attention due to the following reasons:
a. Pandemic: The COVID-19 crisis showed how environmental and social issues are closely interlinked with economic stability and can impact the company's bottom line.
b. ESG conscious millennials: This generation typically endorses banks, investments, and funds with demonstrable social and environmental sensitivities.
c. Support investor interest in "doing good": Investors want banks to consider the ESG risks while earning returns on investment.
d. Empowered employees: Nowadays, employees are more likely to choose workplaces that demonstrate a commitment to caring for two Ps: People and Planet, and not just for Profit.
How can a bank be socially responsible?
In addition to the initiatives that a bank supports with its lending activity, the following certifications and memberships indicate its commitment to social responsibility.
Transforming investment strategies
Banks must consider the investment guidelines and exhibit transparency of investment to customers. A socially responsible bank has policies that prevent it from investing in certain types of companies, such as companies that perform animal testing, employ child labor, make cigarettes, etc.
B Corp certification
B Corp certification is a private certification of for-profit businesses. It certifies businesses based on their social and environmental performance. For financial institutions to be B Corp-certified, they must pass a series of assessments and verifications. B Corp identifies:
- how a bank bridges the gap in the community, or within society, in general
- how responsible it is towards the environment
- how socially responsible the bank is towards its employees and other stakeholders
The Global Alliance for Banking on Values (GABV) Membership
GABV is a coalition of financial institutions that focuses on achieving sustainable economic, social, and environmental development worldwide. The members take part in projects that have a positive impact on society.
Approved by the Community Development Financial Institutions (CDFI)
CDFI is a federally funded program that helps underserved communities access financial services and products. For example, a CDFI-approved bank will offer products to encourage economic development in low-income societies.
How are banks rated on ESG parameters?
Banks opting for sustainable/ethical banking are evaluated and rated on their environmental, social, and governance (ESG) performance by third-party rating organizations. Institutional investors, financial institutions, and other stakeholders are now focusing on these reports and ratings to evaluate and compute a company's ESG performance over time as compared to its peers.
However, reports and ratings methodology, scope, and coverage vary greatly among providers. Some well-known third-party ESG reports and rating providers are:
Bloomberg ESG data service
In 2009, Bloomberg acquired New Energy Finance, which informed regarding the carbon market and instituted Bloomberg ESG data service.
Bloomberg evaluates companies' data every year through various sources, including collecting ESG info through direct contact or as disclosed by companies via CSR reports, annual reports, etc.
Corporate Knights Global 100
Corporate Knights, a Toronto-based company, publishes an annual index of the Global 100 most sustainable corporations in the world in its publications.
The ranking is based on publicly disclosed data. All industries mapped to various geographies are analyzed, as per 14 key performance indicators. Companies are scored on the relevant performance indicators for their specific industry.
While most banks have started their transformation journey towards sustainable banking, given the influence of everyday banking, there is still a long way to go. Continuous efforts of banks and people towards a sustainable future can expedite this process and pave the way for more socially-conscious banking system.
Want to know more? Get in touch with our ESG-savvy banking experts today!