Advocates believe the Principles for Sustainable Banking — launched with over 100 signatory banks in autumn 2019 — will unleash transparency and help the banking sector bring its finances in line with climate and clean energy goals. But to their critics, they represent a sustainability fig-leaf that will enable business as usual

MONEY MATTERS In 2006, the UN and a group of institutional investors launched the Principles for Responsible Investment requiring signatories to incorporate environmental, social and governance factors into investment decision making. Inspired by this success story, the Principles for Responsible Banking were unveiled in September 2019 with 132 signatory banks — around one-third of the global banking system

SPEED CONCERNS While many believe the new principles will encourage banks to finance positive change, others are concerned that deadlines are too long and totally out of line with the climate urgency described in the Paris Agreement

KEY QUOTE “Banks are at many different starting points; we would describe the principles not as entry conditions, but as a ladder. You get on at any rung on the ladder — wherever you are, you’re welcome.”

“A massive boost for climate action and sustainability,” is the UN’s description of the Principles for Responsible Banking (PRB). The UN’s sentiments are echoed by the CEO of Germany’s Commerzbank, Martin Zielke. He says the principles demand: “The transformation of the real economy towards sustainability.” Likewise, boss of Amsterdam-headquartered ING bank Ralph Hammers says they reflect the: “Moral obligation [of banks] as global corporate citizens to finance positive change.” Environmental activists are more sceptical. “We have seen this before — it is too little, too late,” says Johan Frijns, executive director of NGO Banktrack. “This would have looked very good in 1992, but the principles seem to have been drafted as if we have all the time in the world to deal with sustainability problems.” Certainly, the PRB have been a long time coming. They are modelled on the Principles for Responsible Investment (PRI), launched in 2006 by the UN and a group of institutional investors. The PRI, which require signatory investors to incorporate environmental, social and governance (ESG) factors into investment decision making, have been hugely successful. They now have more than 2300 signatories who manage almost $90 billion in assets — more than half of professionally managed financial assets globally. “Ever since the PRI were launched, the question has come up as to whether banks should have a similar framework,” says Eric Usher, head of the UN Environment Programme Finance Initiative (UNEP FI), which acts as the secretariat to the PRB. The feeling among many banks, however, was that their environmental and social risk management processes were adequate to ensure they managed their sustainability exposures, he says. “The turning point came in 2015 with the signing of the Sustainable Development Goals (SDGs) and the Paris climate agreement,” he adds. “Banks began to realise that you can’t only take a transactional view … From that point, regulators, clients and customers began asking questions, and banks realised that these issues were becoming more strategic in nature,” says Usher. Enter the PRB. Launched in draft form in 2018 by 30 founding banks, then subjected to a consultation process, they were formally unveiled in September 2019 in New York, with no fewer than 132 signatory banks, based in 49 countries, and representing $47 trillion in assets — around one-third of the global banking system. SIX PRINCIPLES Similar to the PRI, signatories commit to six principles. Principle 1 calls on signatories to align their business strategies with the Paris Agreement and the SDGs, while Principle 2 calls for PRB banks to set targets related to their impacts on and risks to people and the environment. The following principles require signatories to work with clients and customers to encourage sustainable practices, consult with stakeholders, ensure appropriate governance, and commit to transparency and accountability regarding their “positive and negative impacts and contribution to society’s goals”. For some NGOs, however, the principles are too vague. Frijns says they should require that banks commit immediately to end investment in new fossil fuels and introduce no-deforestation policies, in a response to the despoliation of the world’s vital rainforests. “There is always a tension between how prescriptive you are and how much latitude you allow in principles such as these,” says responsible investment veteran Rory Sullivan, co-founder of consultancy Chronos Sustainability, who helped draft the PRB. “NGOs have a legitimate set of concerns, but greater prescription would have limited the principles’ uptake.” James Vaccaro, special advisor to Triodos Bank, a specialist Dutch sustainable lender, argues that the PRB go further than the PRI in specifically referencing Paris and the SDGs. These references provide “the light on the hill, in terms of where we want to get”, offering an external goal outside of finance towards which to work. Vaccaro, a member of the core group of UNEP FI, which was responsible for drafting the principles, argues that the intention is to create a “ratchet” for progress. That ratchet is created by requiring banks to think about their impacts, to set and publish targets — and communicate around them. “Working with clients and other stakeholders to set targets, and then being fully transparent and accountable for them … it becomes a natural motor, driving a race to the top,” he says. Sullivan agrees, describing the second principle to define risks as a game-changer. “The banking sector has done some good work on sustainability, but very often it has not been about its core business,” he says. Sullivan believes that talking about the biggest impacts of banks, rather than focusing on processes, is a genuinely interesting departure. It is a view shared by credit rating agency Moody’s. In a note to clients, the agency said: “We expect more from the Principles for Responsible Banking than previous initiatives. Target setting, transparency and accountability are key features of the principles which will facilitate market scrutiny of banking progress and compliance.” The need to set targets, be accountable for them and demonstrate measures are in place to do this is the most challenging aspect of the principles, says Toni Ballabriga, global head of responsible business at Spanish bank BBVA, one of the 30 founding banks.

OPEN TO EVERYONE A key consideration in drafting the principles was ensuring that banks from around the world were able to sign up, regardless of where they are in their embrace of sustainability, says Usher. “Some in civil society said that banks shouldn’t sign the principles until they are fully compliant — the signing should be a badge of honour,” he says. But he disagrees. “Banks are at many different starting points; we would describe the principles not as entry conditions, but as a ladder. You get on at any rung on the ladder — wherever you are, you’re welcome.” Nathan Fabian, chief responsible investment officer at the PRI, says: “The reason that principles are used is because there can be a range of interpretations in practice.” He believes principles are: “The best way to get wide participation and encourage progress for firms at different stages of learning. They are a sound model for organising diverse communities.” He adds: “Within these spaces, people tease out what good practice is, and then the expectations around performing to a high standard become clearer. That is a very legitimate way to organise these groups.” This diversity of prospective signatories also militated against the principles being too prescriptive on climate change given that some economies remain heavily coal dependent. Fabian suggests the social impacts of moving away from fossil fuels can limit the speed with which some banks could divest from the sector. “That said, we all recognise that climate and emissions is the most urgent issue, but it is a complex issue.” Frijns at Banktrack argues that the PRB do not acknowledge that urgency, specifically with the long ramp-up they offer signatories: 18 months before they are required to publish targets, and a further two years before banks are expected to have fully implemented the PRB’s requirements. “It is all happening at a very slow pace,” he says. “We don’t have up to four years to see if a bank is aligning its business with the Paris Agreement.” Vaccaro at Triodos disagrees. “In global terms, four years feels like quite a long time. In culture change terms, it is probably the minimum you would need to change every part of your bank’s approach to sustainability.” He says some banks will need to introduce data systems, sustainability policies and carry out internal and stakeholder consultation processes before they can set meaningful targets. That argument cuts little ice with Frijns, who wants to see banks take action now on fossil fuels. “The key question for us is what does it mean to align your business with the goals of the Paris Agreement,” he says. “In our understanding, there is no way that you can square financing fossil fuel projects with that.” Can a PRB bank continue to fund fossil fuels? “There is nothing in the principles that bans fossil fuels from day one. Does that give me discomfort? For sure,” says Vaccaro. But he adds that while such a commitment might be appropriate for a European bank, it would be very difficult for some developing country banks, or banks where political opposition to taking action on climate change remains high, to immediately embrace such a requirement. “That said, I think we’re getting to the point, globally, that financing more fossil fuels just doesn’t make sense,” he says.

MEASURING SUCCESS In terms of judging their success, Usher believes expectations are very high. He acknowledges that greater uptake of the principles will be one measure, but more important is: “Whether we can show impact in terms of banks changing their business, over time, in critical areas,” including climate. “Success has to be measured, in the long run, in showing how their balance sheets and their businesses have been changing regarding some of the biggest issues of the day,” he adds. In the shorter term, Sullivan wants to see how seriously banks are about identifying their most material impacts. “Signatories need to identify the impact of their lending portfolios, or their relationships with government, or bribery and corruption as their most significant issues … If a UK retail bank cites deforestation in Guatamala as its biggest impact, it wouldn’t be taking the principles seriously.” Sullivan continues: “One of the big contributions of the PRI has been to say to investors that the things we care about aren’t your buildings or the bit of travel your executives do, it’s the characteristics and impacts of your investment portfolios.” “It is reasonable to be sceptical about the PRB, but they are a very good starting point,” says Sullivan. “Compared to the PRI principles, they are definitely a step up in terms of expectations and the way that accountability could work. The next step is, what will the signatories do to actually implement them — that is an open question.” While the four-year implementation deadline may seem a long way off, Vaccaro is confident the leading banks will use the target-setting and transparency processes as a spur to greater action before then. “I would like to see a race to the top occurring,” he says, holding up the We Mean Business coalition as a model, whose corporate members compete to out-do their peers in terms of climate change commitments. “Where there is a community of banks who are genuinely progressing and accelerating … then it is working,” he says.

TEXT Mark Nicholls