Sustainability in Banking: Key Stakeholders
(Published in the Financial Express in October 2019)
Dr. Shah Md Ahsan Habib
The contribution of sustainable action goes beyond growth, and for banks it drives beyond profitability. Alongside targeting profitability, through sustainable banking activities a bank aims at addressing qualities of profitability in economic, social and environmental fronts. These agendas and practices vary from country to country and should always be considered in accordance with the level of development. This is an attempt on the part of a bank to take care of the interests of all stakeholders. Thus, ‘Sustainable Banking’ cannot be desegregated from the key concerns of corporate governance, leadership and corporate social responsibility practices by banks. A number of sustainable banking activities are clearly associated with the UN Sustainable Development Goals (SDG) to be attained by 2030 for ensuring economic, social and environmental wellbeing of the Globe.
‘Sustainable development’ is an integrated concept of ‘Sustainable Banking’ and is associated with three aspects: economic, social and environmental; and ‘Sustainable Traditional banking and financing activities focuses solely on financial return and risk, whereas sustainable finance considers financial, social and environmental returns in combination of highlighting the move from the narrow shareholder model to the broader stakeholder framework, aimed at long-term value creation for the wider community. It cannot be denied that there are wide differences on the coverage and approach of sustainable banking. Due to the lack of a definition of sustainable finance and banking, different players in the banking industry have different approaches to sustainable finance. In spite of differences in perceptions and scopes, generally the available recent literature perceives the concept broadly as compared to the earlier age, and it is most commonly now tagged with long term goals associated with economic, environmental and social aspects. And in the economic front profitability and financial strength is at the center.
Considering the goals and coverage, it is possible to have interconnections between ‘UN Sustainable Development Goals’ and ‘Sustainable Banking’. Corporate Social Responsibility (CSR) might be another notable channel. The SDGs might also be an opportunity for the industry to further establish sustainability principles. United Nations Global Compact and KPMG International identified four areas for the financial industry to address the SDGs: financial inclusion; financing renewable energy and sustainable infrastructure; including sustainability risk analyses in financial decision making; and influencing corporate clients to address environmental, social and governance criteria in their businesses. Regarding efficient allocation of banking resources, efficient financing of business and economic activities in a sound prudential environment may ensure greater investment and economic growth with financial stability. CSR interventions are contributing to ensure greater access to finance and other basic services, and to improve better livelihood of the low-income people. In the context of most developing countries, the association of agricultural financing and access to finance and rural development can be clearly visible. Micro and small enterprise financing (including women entrepreneurship financing) can contribute in rural development, gender equality and poverty reduction.
Globally, different policies and strategies have been implemented to achieve sustainable banking goals considering the uniqueness of economy, need and nature of priorities. Through the UN SDG, the world has set for itself a set of objectives to end poverty, hunger and to overcome inequality in a sustainable manner by 2030. Realizing the 2030 Agenda would require a profound transformation of food systems, including the agriculture sector, as well as a transformation of rural economies. G-20 recognized financial inclusion as a key enabler of growth and inclusive financial sector is considered crucial for attaining the goals contained in the UN Declaration. A number of standard-setting bodies have accepted that the issues relating to financial inclusion need to be incorporated in the international regulatory framework, and the creation of the Alliance for Financial Inclusion (AFI) as a global platform for sharing financial inclusion insights is a clear sign of this new vision. With a shared global agenda (the Maya Declaration) and strong national targets to bring a positive impact to the lives of the poor, more than 100 AFI member institutions have created a global momentum for change. These initiatives have offered common grounds for international cooperation on the issue of financial inclusion. UNEP has been constantly working for designing and developing sustainable finance by promoting environmental risk management in financing and investment activities in developed and developing countries.
Some global group initiatives and bankers’ associations are also active. The Sustainable Banking Network, established in 2012, is working to launch national policies, guidelines, principles, or road maps focused on sustainable banking. Another similar forum – Sustainable Insurance Policy Forum (IPF) is similarly bringing together regulators, policymakers and industry associations to share learning and best practice to promote supervisory and regulatory leadership on sustainability challenges and opportunities for the insurance sector. Some bankers’ associations like Mongolian Bankers Association, the Kenya Bankers Association, Association of Columbian Banks, Sri Lankan bankers’ Association and similar associations in other countries are also engaged in developing and enforcing sustainable banking standards, policies or regulations. The Colombian government and the representative association of Colombian banks signed a voluntary framework and guidelines (Green Protocol) in 2012 that sets out strategies and guidelines for banks to offer credit lines and investments that are expected to contribute to quality of life and sustainable use of renewable natural resources. The Central Bank of Kenya and the Kenya Bankers Association formed a partnership to promote the effective implementation of the market-led Sustainable Finance Principles, and have also recently joined the global Sustainable Banking Network supported by the IFC. In July 2015, the Sri Lankan Bankers’ Association launched the Sustainable Banking Initiative (SL-SBI) that has successfully crafted and launched a set of sustainable banking principles, and since August, 2017 the SL-SBI started a program to develop an ambitious knowledge sharing platform to guide Sri Lankan banks on how to implement the principles. A number of developed and developing countries have been promoting alternative financial institutions such as micro finance institutions, Self Help Groups or other local level units to ensure financial services to reach the excluded part, while others have simplified existing products to overcome the difficulties in accessing financial services. In United Kingdom, government identified the need for financial literacy and basic financial concepts as a critical success factor for financial inclusion. Subsequently, government started to work with banks, launched separate funds, and introduced taskforce to supervise and monitor the progress. To promote financial inclusion in Germany, The German Bankers’ Association introduced a voluntary Code in 1996 to provide banking transactions to everyone to ensure easy and less cumbersome banking facilities for the benefit of every member of the community. In several instances, governments and central banks in developing economies adopted developmental goals and have already pioneered innovative methods with the support of new technologies to increase financial literacy and boost financial inclusion.
 Professor and Director (Training), BIBM ([email protected]).
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