It is 2020. Climate change is accelerating. Land, air and water pollution are on the rise. The global population is growing, coupled with an erupting digital revolution. The need to preserve our society, economy, and environment has never been greater. For many years, sustainability has merely been a buzzword. However, recently, there has been increased focus by supranational organizations, nations, regulators, and multinational institutions.
The principles surrounding sustainable development are evolving. Globally, the Financial Stability Board launched the Taskforce on Climaterelated Financial Disclosures (TCFD). Earlier in 2019, the United Nations Environment Program (UNEP) Finance Initiative released the “Principles of Responsible Banking,” following the earlier release of the “Principles of Responsible Investment.” Sustainability is defined as “meeting the needs of the present without compromising the ability of future generations to meet their needs,” according to the United Nations Brundtland Commission.
In the GCC, sustainability is a common theme across the visions and strategies of all six Gulf states, with the stock exchanges of five out of the six states being “Partner Exchanges” of the Sustainable Stock Exchanges Initiative. Sustainability is becoming an integral component of the agendas of boards and executive management, for a number of Middle Eastern entities. More than half of the top 10 Middle Eastern banks according to Forbes Middle East have publicly issued sustainability reports for 2018.
But what exactly can banks do, and what impact can they have? According to the UNEP-FI Principles of Responsible Banking, there are six principles for responsible banking.
Principle 1: Alignment:
Aligning business strategies with sustainable goals for society can be done by supporting and empowering SMEs and entrepreneurs, as well as focusing on financial inclusion and public access to financial services. This entails capturing environmental and social risks within their risk management programs.
Principle 2: Impact and target setting:
Setting targets and goals that ensure the bank is in continuous improvement with regards to reducing the negative impacts on people and environment, as a result of offering products and services. ING committed to only financing “green” office buildings from 2018, as a commitment to its sustainability strategies.
Principle 3: Clients and customers:
Working responsibly with clients to encourage sustainable practices and support economic activities that support future generations. Citibank’s “Sustainable Progress Strategy” has committed $100 billion over a 10-year period into “Environmental Finance,” to advise and finance projects focused on environmental and climate change solutions. ING has twice (in 2015 and 2018) issued billions of dollars in green bonds, with the proceeds to be used to fund a “green loan portfolio”.
Principle 4: Stakeholders:
Establishing mechanisms to ensure the bank is partnering with the right stakeholders who share its values and preserve society, the environment, and the economy. Several global banks are organizing vendor forums targeted at transferring such values to the overall supply chain.
Principle 5: Governance and culture:
Defining an adequate governance structure for sustainable development, which may entail defining roles and responsibilities within the organization, and embedding such principles in the bank’s policies and codes of conduct.
Principle 6: Transparency and accountability:
Reviewing, periodically, the bank’s adherence and commitment to such principles, and ensuring transparency and disclosure to the public on such practices.
Given the large economic impact and wide footprint they possess, banks are in a real position to have an impact on society, the economy, and the environment. With the evolving needs of society, and the ongoing changes in our ecosystem, the need to adopt sustainability strategies and plans is growing increasingly important, for banks to be able to effectively manage their strategic and reputational risks.
By Fadi Berjawi, Senior Manager, Risk Advisory, Deloitte Middle East