The push from investors to increase insight into climate risks continues. In the Financial Times Mercy Investment Services (the investment services arm of the Sisters of Mercy in North America) were reportedfiling a motion with Black Rock noting among other issues that “(p)roxy voting practices that ignore climate change seem to ignore significant company-specific and economy-wide risks associated with negative impacts of climate change.” In the same issue of the FT a recent study by Bank of America was cited noting that “(q)uarrels involving environmental, social and governance issues have wiped more than $500bn off the value of large US companies over the past five year.” Further support for including ESG issues comes from the recent study from the GABV cited in my featured article. For bank lenders these issues are also relevant as they should be part of the risk assessment process. But how many banks are actually assessing the risk of ESG issues when the make underwriting decisions?
The times they are a changing – but not fast enough
The Financial Times noted today that many large investors are now looking for companies to detail their carbon emissions. This trend got attention earlier in the month when Chris Hohn/TCI noted opposition to re-election of directors for companies not fully disclosing their carbon emissions. However, the impact of this change is limited by the large number of institutional assets (we are talking about our pension funds amongst others) that invest via passive index funds. Reuters has reported that the large index providers (MSCI, S&P Dow Jones, FTSE Russell) are looking at ways to accelerate the inclusion of Aramco in their indexes. This means that trillions of dollars of assets will be shifted into an oil giant. Clearly there is an issue to be addressed for making passive investments based on index providers socially and environmentally responsible. How can we as investors directly or through our pension funds address this issue?
(p.s. Thanks to my friend Jan for alerting me to the Reuters article)
Banking Opportunities – Who will seize them?
The opportunity to support companies developing storage of renewable energy could be a growth area for banks. The EU has announce a program to encourage this development as highlighted in this article from the Financial Times. And the development of new technology continues as reported by The Economist. What bankers will grab the opportunity to be the go to bank for renewable energy storage?
Value creation through a focus on ESG
McKinsey has just published Five ways that ESG creates value in its quarterly. Of interest is their estimate that 50% to 60% of banking profits are at stake from good ESG practices. As noted in the report: “getting (ESG) wrong can result in massive value destruction.”
Do Sustainable Banks Outperform?
I plan to provide a longer article every 4 to 6 weeks exploring a relevant topic in more detail.
This week ground-breaking research analyzing the financial performance of the 100 largest banks in the world was released showing banks that outperform on material sustainability issues also outperformed financially. This research was one of the last projects I worked on at the Global Alliance for Banking on Values. The research was conducted by KKS Advisors with support from the European Investment Bank and Deloitte in addition to the Global Alliance. The summary chart from the report was featured in the Financial Times Moral Money article of 11 December 2019. The full report can be downloaded from the Global Alliance from this link.
This research builds on the long time research of the Global Alliance that compared the financial profiles of the largest banks in the world – the banks too big too fail – with the members of the Global Alliance. This research grew out of the initial actions following the 2010 meeting of the Global Alliance in Dhaka, Bangladesh hosted by BRAC Bank. At that meeting we decided to look at two issues: 1) developing sources of capital for values-based banks and 2) developing metrics to measure not only financial but also social and environmental results in banking.
To make the business case for investing capital in values-based banks, the Global Alliance decided to look at the financial profiles of values-based banks with the Global Systemically Important Banks as defined by the Financial Stability Board (e.g. the banks too big to fail). This research was published in early 2012 with data through yearend 2010. It has subsequently been updated on an annual basis.
The results of the comparisons showed substantial differences between the two sets of banks. Values-based banks had a very significantly greater exposure to the real economy, a great reliance on client deposits for funding, stronger capital positions, and stronger and more stable financial returns when compared with the largest banks in the world. In other words those banks that claim to be shareholder driven were actually delivering poorer results than banks focused on delivering social and environmental results for the communities in which they operate.
However, the research of the Global Alliance was criticized for comparing apples and oranges (e.g. small niche banks and large global banks) and not analyzing the financial returns from an investor perspective. The challenge was to address these two issues with another research approach. In research published in 2016, it was shown that firms with good ratings on material sustainability issues significantly outperform firms with poor ratings. This research developed by George Serafeim of Harvard Business School among others did not focus on banks.
The recently released research used publicly available data for the 100 largest international banks by market capitalisation as of September 2018 to determine if a focus on material sustainability issues as defined by the Sustainability Accounting Standards Board led to better financial performance relative to returns to investors. The results showing that this was the case are summarized in this chart.
I would encourage you to read both the GABV research as well as the new report. I believe both show that a focus on values-based banking is compelling not only due to its ability to deliver social and environmental results but also financial results for investors. Values-based banks by focusing on delivering value to society, deliver value to their investors.
There are many more research issues raised by the new report. And the exploration of the drivers of success are not fully clear. I hope to further explore those issues in the future.