Commercial banks reap financial rewards of prioritising sustainability has been saved
Commercial banks reap financial rewards of prioritising sustainability
11 December 2019
Commercial banks that prioritise sustainability outperform those which do not, according to a new research report issued by the Global Alliance for Banking on Values (GABV) and produced with the support of the European Investment Bank and Deloitte.
Recruited by the GABV, KKS Advisors analysed data from 100 of the largest commercial banks, scored on their pursuit of ‘material’ environmental, social and governance (ESG) issues over a ten-year period. Applying the materiality approach of the Sustainability Accounting Standards Board (SASB), the analysis showed that those who consistently scored well on material ESG issues, also delivered higher than average financial returns. Taking into account the limitations of the data available, this higher financial return is estimated to be about 200bps.
The banks’ ESG performance was measured on a number of issues, both material and immaterial. The SASB identifies material ESG issues as those that are likely to impact the financial condition or performance of a company. These included factors such as access and affordability, labour practices, diversity and inclusion, and data security.
Immaterial issues are those that the SASB does not consider to significantly impact the financial condition or operating performance of commercial banks.
The findings could prove useful to investors when making capital allocation decisions, showing that a bank’s performance on ESG factors may be an indication of their future financial performance.
Marcos Eguiguren, executive director at the Global Alliance for Banking on Values, said: “Intentionally embedding social and environmental sustainability values into the culture and practices of banks is at the core of banking that measurably advances social inclusion, environmental wellbeing and quality of life. The findings of this report point to budding change in the mainstream banking sector and to extensive opportunities for amplifying and expanding the positive cycle of impact, resilience, stability and profitability, which values-based banks continue to demonstrate.”
Richard Kibble, banking strategy partner at Deloitte, said: “Sustainability issues must be a top priority for banks, Boards and investors alike. There’s a lot of discussion about the ethics of banking, but there’s been little research looking at the profitability of it to date. This report is a great start. Banks need to place as much weight on sustainability as they would on economics when making strategic decisions.”
Hakan Lucius, head of Corporate Responsibility at the European Investment Bank (EIB), said: “Responding to the climate and environmental crises is an urgency and a shared responsibility for all stakeholders. This report supports the view that taking into consideration material ESG issues helps to strengthen commercial banks’ business model. The EIB welcomes this result considering that sustainable finance shapes our activities and investment decisions.”
Notes to editors
About the study
The research was carried out by KKS Advisors on behalf of the GABV, and supported by the European Investment Bank and Deloitte. The sample analysed is comprised of the top 100 international banks by market capitalisation as of September 2018, falling under Standard Industrial Classification’s primary industry classification of Commercial Banking. Using publicly available data on each of the 100 commercial banks, they were evaluated and scored on their pursuit of material and immaterial sustainability issues. Stock returns from 2007 to 2017 were then analysed. In order to score companies from highest to lowest each year on both material and immaterial ESG issues, a Materiality Index and Immateriality Index were developed.
Material issues for commercial banks measured were:
- Access and affordability
- Labour practices
- Data security and customer privacy
- Lifecycle impacts of products and services
- Business ethics
- Systemic risk management
Diversified banks were also measured for the following which were also deemed material:
- Fair marketing and advertising
- Compensation benefits
- Diversity and inclusion
- Integrations of ESG risk factors
- Management of the legal and regulatory environment
- Systemic risk management
Immaterial issues* included:
- GHG emissions and climate change
- Energy management
- Water resource management
- Human rights and community relations
- Employee health and safety
- Business model resilience
*Please note that these issues are deemed material to banks when considered as part of their lending/investing activities.
The Global Alliance for Banking on Values is a not-for-profit organisation and independent network of banks and banking cooperatives. They have a shared mission to use finance to deliver sustainable economic, social and environmental development. Founded in 2009, the GABV comprises of 64 financial institutions and 15 supporting partners operating in countries across Asia, Africa, Australia, South and North America and Europe. Collectively, we serve more than 56.3 million customers, hold up to $197,6 billion USD of combined assets under management, and we are supported by more than 67,000 co-workers. Learn more about the GABV, meet all our members and find how we are working to build a growing, global, values-based banking movement.
About European Investment Bank
The European Investment Bank (EIB) is the Bank of the European Union, and is owned by the EU Member States. It is both a bank and an EU body, and supports projects that make a significant contribution to growth, employment, economic and social cohesion and environmental sustainability, both in the EU and beyond. The EIB’s headquarters are in Luxembourg, and there are external offices to support its activities, both in Europe and further afield.
For more information please visit www.eib.org
In this press release references to “Deloitte” are references to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”) a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity.
Please see deloitte.com/about for a detailed description of the legal structure of DTTL and its member firms.
Deloitte LLP is a subsidiary of Deloitte NSE LLP, which is a member firm of DTTL, and is among the UK's leading professional services firms.
The information contained in this press release is correct at the time of going to press.
For more information, please visit www.deloitte.co.uk
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This report does not constitute an offering of securities of any kind and is intended to convey only basic background information. Nothing herein may be construed as a representation or warranty by the Global Alliance for Banking on Values. The information contained herein may not be interpreted as binding or guaranteed with respect to the past, present or future. Financial information and other data contained in this document are based on subjective analyses and have not been independently verified. This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of the contents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material in this publication. The views and assessments contained in this report reflect the views of the authors and do not necessarily represent the views of the European Investment Bank (EIB), Deloitte or the Global Alliance for Banking on Values.