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Sustainable Banking Scorecard Overview 2015
Global Alliance for Banking on Values – A short history
Year
2009 Independent network of sustainable banks founded with nine members and combined assets of nearly USD 12 billion
2010 Goal established of touching one billion lives with sustainable banking by 2020
2011 Plans created to find new sources of capital, develop human capital, and improve metrics on non-‐financial results
2012 Research issued comparing financial profiles of sustainable banks with Global SystemaFcally Important Financial InsFtuFons
2013 Berlin DeclaraFon, iniFaFon of investment vehicle to provide new sources of capital and development of Scorecard for assessing banking sustainability focus
2014 25 members with yearend 2013 assets of USD 77 billion and nearly USD 17 billion in funds under management -‐ now 28 members
Page 2
The Principles of Sustainable Banking
Triple Bo*om Line central to business model
Transparent and inclusive governance
Long-‐‑term oriented and resilient to disruptions
Long-‐‑term client relations, understanding their activities
and risks
Grounded in communities, serving the real
economy All principles embedded in the bank’s
culture
Page 3
The Business Case for Sustainable Banking Real Banking for the Real Economy: What long term value does a bank provide to stakeholders including society, clients and investors?
Four questions researched using financial information through year end 2013:
• What support does a bank provide to the real economy?
• How resilient is a bank in the face of economic challenges?
• What returns does a bank provide to society, clients, and investors?
• What growth does a bank deliver to expand its impact?
Page 4
GABV Research: Real Economy
In October 2014 the GABV published updated research comparing Sustainability Focused Banks (SFBs) with the Global Systemically Important Financial Institutions (GSIFIs)
Exposure to real economy was estimated by ratios of Loans and Deposits to Total Assets
SFBs show substantially higher exposure to the Real Economy
Loans / Total Assets 2013 2008 2003
SFBs 76.2% 76.0% 77.1%
GSIFIs 40.5% 38.8% 43.4%
Deposits/Assets 2013 2008 2003
SFBs 80.4% 71.5% 71.4%
GSIFIs 48.8% 42.0% 47.3% Page 5
GABV Research: Capital Strength
SFBs maintain high capital positions in terms of Equity to Total Assets
GSIFIs outperform SFBs in the Tier 1 Ratio in 2013 but the ratio of RWAs to Total Assets highlights the impact of non-transparent RWA models on this capital ratio
Equity / Total Assets 2013 2008 2003
SFBs 7.7% 7.3% 6.2%
GSIFIs 6.6% 5.0% 5.2%
Tier 1 Ratio 2013 2008 2003
SFBs 12.4% 11.6% n/m
GSIFIs 13.3% 10.1% n/m
RWA / Total Assets 2013 2008 2003
SFBs 60.9% 60.5% n/m
GSIFIs 39.8% 41.0% n/m Page 6
GABV Research: Real Returns
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
RoA
Sustainable Banks GSIFIs
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
RoE
Sustainable Banks GSIFIs
Financial returns for SFBs are attractive, especially considering their higher level of Equity to Total Assets:
Ø Starting in the crisis year of 2008 SFBs consistently outperform GSIFIs in RoA while delivering slightly higher levels of RoE
Ø SFBs show much lower levels of volatility in their returns
Page 7
GABV Research: Growth
Page 8
SFBs show much higher growth in key operational activities, especially in the post-crisis period when compared to GSIFIs.
Total Loans From 2003 From 2009
SFBs 9.3% 13.2%
GSIFIs 8.3% 3.8%
Total Deposits From 2003 From 2009
SFBs 10.4% 15.3%
GSIFIs 9.4% 4.9%
Total Income From 2003 From 2009
SFBs 6.4% 8.5%
GSIFIs 6.4% 6.5%
Why is GABV developing a Scorecard? A structured approach based on the Principles of Sustainable Banking and developed with practitioner knowledge and experience for:
Addressing the Berlin Declaration goals
Structured reporting on sustainability to stakeholders by banking institutions
Assessing of banks for GABV membership
Assessing of banks for investments by Sustainable | Finance | Real Economy
Self-assessment tool by banks with a sustainable banking agenda
Page 9
Sustainability Banking Scorecard: The Structure
Sustainability Score Basic
Requirements Quantitative
Factors Qualitative Elements
• Regulated Banking Institution
• Sustainability Mission • Transparency
• Financial Viability • Real Economy Focus • Triple Bottom Line Focus
• Strategic Direction • Implementation • Identifiable Results
STOP Base Sustainability Score
Sustainability Score Calibration GO
Page 10
Sustainability Score
100 90 80 70 60 50 40 30 20 10 0
Established : Financial institutions that already demonstrate, through their business models, internal practices and results, an authentic and thorough commitment to embedding sustainability into their banking model to meet the needs of their communities.
Sustainability Score
Engaged: Financial institutions whose leadership has embraced the sustainability-focused banking model and have made concentrated efforts to steer the organization in this direction, though its products and internal practices lack full realisation.
Emerging: Financial institutions whose management is convinced of the power of a sustainability focused banking model and has the sincere intention and initial actions for steering its institution towards the adoption of sustainability-focused banking products and services.
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STOP
Regulated Banking Institution Statement regarding regulatory framework and status and evidence of client deposit and lending relationships
Mission Statement Institution’s mission statement has elements related to at least one of the Principles of Sustainable Banking
Reporting Transparency Evidence of transparency of reporting to all stakeholders, especially relative to sustainability commitments
GO
Basic Requirements
Quantitative Factors
Qualitative Elements
Basic Requirements
Page 12
Quantitative Factors: Overview
The Quantitative Factors provide insight into three elements – Financial Viability, Real Economy Focus and Triple Bottom Line Focus – addressed in the Principles
A variety of Quantitative Factors are measured with a focus on using existing financial reporting information supplemented by management accounting elements. Management accounting reporting allows for more transparency and consistency.
Financial Viability
35%
Real Economy
Focus 25%
Triple Bottom Line Focus
40%
ROA 10%
E/A 10%
AQR 5%
D/A 10%
REA 15% RER
10%
TBLA 40%
Page 13
Quantitative Factors: Base Sustainability Score
Metric Weight Minimum Benchmark
1. Return on Assets (RoA) – 3 year average 10 0% Market
2. Equity to Total Assets (E/A) 10 3% 8%
3. Asset Quality Ratio (AQR) 5 0% Market
4. Client Funding to Total Assets (CFA) 10 30% 75%
6. Real Economy Assets to Total Assets (REA) 15 30% 65%
5. Real Economy Revenues to Total Revenues (RER) 10 50% 75%
7. Triple Bottom Line Assets to Total Assets (TBLA) 40 10% 55%
Basic Requirements
Quantitative Factors
Qualitative Elements
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Quantitative Factors: Real/Financial Economy Concepts
A concept developed for practical decisions on how to distinguish between a Real Economy Asset and a Financial Economy Asset
The core banking activity is intermediating between providers and users of capital by managing Money at Risk Exposures
Classifying Real Economy Assets and Financial Economy Assets is crucial to determine the allocation of Money at Risk by a bank, and thereby to reveal its business model focus
The allocation of Money at Risk across the Real Economy and the Financial Economy, and within those categories, to Triple Bottom Line activities, reflects priorities and focus of a bank business model, and hence its sustainability focus
Page 15
Managing Money at Risk Exposures: A Three Dimensional View
On Balance Sheet
RE FE
Off Balance Sheet
In assessing the allocation by a banking institution of its Money at Risk Exposures, there are three independent dimensions to consider:
1) On or Off Balance Sheet 2) Financial Economy or Real Economy 3) Triple Bottom Line or Non-Triple Bottom Line
Non-TBL
TBL
Page 16
Financial instruments should be classified as Real Economy if they are no more than one degree from a Real Economy Asset or Activity. A specific type of financial instrument could be in different categories depending on its actual use by the banking institution.
Real/Financial Economy Guidelines Degrees of Separation Concept
Real Asset/ Activity
One degree
Two degrees
Three degrees
Four degrees
Real Economy Financial Economy
Financial instruments with fewer degrees of separation from the Real Economy demonstrate Transparency and closer Client Partnerships
Transparency
Client Partnerships Page 17
People: social empowerment
Planet: environmental regeneration Prosperity: economic resiliency
Triple Bottom Line Activities: Categories to Consider
Education, health care, social inclusion, arts and culture, or special needs housing
Renewable energy, energy efficiency or retrofits, green-oriented housing or buildings, waste or pollution reduction, water efficiency and access, or sustainable agriculture
MSME lending, micro-finance for micro-enterprises, or economic inclusion
Money at Risk may meet more than one of these Triple Bottom Lines
Page 18
Real/Financial Economy Dimension Triple Bottom Line – Examples
Real Asset
One degree
Two degrees
Three degrees
Four degrees
• Loan to finance energy retrofit • Loan to food manufacturer • FX forward contract for clothing
exporter
• Alternative energy equity stake • Direct financing leveraged buyout • Real-estate fund with direct
investments in property
• Shares purchased in secondary market for SRI fund
• Liquidity deposit with other banks • Loan to hedge fund for buyout
• Hedge of client FX positions with other banks
• Mortgage backed securities for low income housing
• Tranche of a Collateralised Debt Obligation for commercial loans
• Specific maturity tranche of mortgage backed securities • Credit default swap
• Local medical clinic • Organic farm • Clothing manufacturer
• Energy-efficient office building • Coal energy plant • Housing for seniors
Real E
conomy
Financial Econom
y TBL
Non
-TB
L To
be
asse
ssed
Page 19
Qualitative Elements: Structure – Scorecard 2014
Guiding Key Points Examples to be included in reporting to enhance consistency
Leadership
Organizational Structure
Products & Services
Management Systems
Human Resource Tools
Performance Reporting
• Publicly available reports • Internal performance
tracking and reporting
Performance Reporting
QE1
QE2
QE3
QE4
QE5
QE6
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Qualitative Elements: Show the Flow
QE1
QE2
QE3
QE4
QE5
QE6
High Level Direction
Implementation and Processes
Identifiable Results Why?
How?
What?
A holistic Flow from High Level Direction to Identifiable Results is required to provide grounding to support the banking institution’s commitment to the Principles of Sustainable Banking
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Qualitative Elements: Calibrating Base Sustainability Score
Example: Policy: Bank X only finances enterprises that benefit people, the environment and culture. All strategic and policy efforts, regardless of the specific discipline within the bank, reflect this focus. Implementation: New products are developed with sustainability integrated in them – from new lending products to apps which connect savers with borrowers Result: Bank X to lends exclusively in sustainable sectors: Environment (x%), Social (x%) and Culture (x%)
Basic Requirements
Quantitative Factors
Qualitative Elements
Structure:
UPDATE FOR NEW
Strategic Direction Implementation Identifiable Results
Leadership
Organisational Structure
Products & Services
Management Systems
Human Resource Tools
Performance Reporting
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Qualitative Elements: Examples
Strategic Direc+on Implementa+on Iden+fiable Results
Performance Reporting Bank will be transparent in reporting on its activities
All lending clients requested to allow publication of
financing
Detailed information on 95% of all loan clients available on
bank website
Products & Services Bank is committed to
financing only sustainable clients
All clients to be assessed using a standard tool relative
to client sustainability
40% of clients have top sustainability assessment
and only 10% of clients had an inadequate sustainability
assessment
Human Resources Tool Bank is committed to relative equality of compensation
Human Resources to ensure that ratio of highest to lowest
pay is relatively equal
Ratio of Top 10% compensated staff to Lowest
10% was 2.3
Management Systems Bank will be compliant with the Equator Principles
Credit approvals for project finance require explicit review relative to Equator Principles
Loans declined for 15 projects due to lack of
compliance. 10 projects restructured to comply with
Equator Principles
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Sustainable | Finance | Real Economy: “SFRE” or “Sapphire”
A Luxembourg domiciled investment vehicle to support Sustainability- focused Financial Institutions (SFIs)
Principles of Sustainable Banking used as a benchmark for investment decisions and monitoring
The GABV Sustainable Banking Scorecard used as a measurement tool
Investments targeted at Tier 1, Tier 2 equity and subordinated debt positions in SFIs, both GABV and non-GABV
Ambition to deploy USD 1 billion in its first 10 years to support growth of the SFI segment with initial closing of USD 40 million in February 2015
Sapphire investments expected to be leverage 10 times into Real Economy lending of which 6 times expected to be focused on Triple Bottom Line lending
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Advocacy/Values-based Banking Day
• GABV events and social media engagement: activating a % of 30,000 co-workers, plus clients, and partners
• Significant social media activity using the hashtag #BankingOnValues • 7500+ public posts • 8.8 million impressions • Supported by CEO selfie photos!
• Media attention in 6 countries surrounding values-based banking and #BankingOnValues
• Creation of a suite of consistent, branded messages and collateral • Activation of a new network of GABV Marketing and
Communications experts • Valuable insights into the importance of language localisation and
how it impacts campaign adoption and engagement
23 October 2014 marked a very successful first international awareness campaign of the GABV : #BankingOnValues
Page 25
Leadership Academy/MOOC
Text to come
• 18-month programme organized in 4 modules hosted by member banks and the MIT
• Targeted at professionals with three to five years experience at executive, mid-management and project management levels
• Gather the next generation of leaders from member banks (and from other like-minded organizations) to: • learn together from experts and senior executives about leadership,
innovation techniques and trends in values-based banking • share their knowledge and experiences • expand their network
• The GABV also collaborates with Co-Lab at MIT to develop a free MOOC on values-based banking
In March 2015, GABV launched the first prototype of its Leadership Academy with 19 highly qualified participants, representing GABV member banks from 5 continents
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