Modern banks play two important roles in the financial system. One, they are at the heart of the clearing and payment system so that transactions are consummated as seamlessly as possible. Two, they are major intermediaries in the reallocation of money or credit from those with excess of funds, the savers, to those with needs or opportunities, the borrowers. Banks make money from spreads or margins as well as from fee business. Traditionally, banks who are able to handle the functions well and efficiently are able to make a lot of money for their main profit objective.
Society today however has more expectations from the banking sector. Banks are expected to embrace the call for multiple bottom lines. In the language of the United Nations, the world must adopt sustainable development goals that extend beyond profit or prosperity. The UN adds four other P’s — people, planet, partnership and peace.
Banks must thus be transparent and clear about how their products and services create value for their customers, clients, investors and society. It was this rationale that drove members of the UN Environment Programme’s Finance Initiative (UNEP-FI) to craft “Principles for Responsible Banking.” This will help any bank leverage business opportunities with the new era of sustainable social, environmental and economic development. Signatories of the principles pledge the following:
1. Alignment. “We will align our business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks.”
2. Impact and Target Setting. “We will continuously increase our positive impacts while reducing the negative impacts on, and managing the risks to, people and the environment resulting from our activities, products and services. To this end, we will set and publish targets where we can have the most significant impact.”
3. Clients and Customers. “We will work responsibly with our clients and customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.”
4. Stakeholders. “We will proactively and responsibly consult, engage and partner with relevant stakeholders to achieve society’s goals.”
5. Governance and Culture. “We will implement the Principles through effective governance and a culture of responsible banking.”
6. Transparency and Accountability. “We will periodically review our individual and collective implementation of these principles and be transparent about and accountable for our positive and negative impacts and our contribution to society’s goals.”
Banks who are signatory to this pledge are expected to take steps that will ensure the quality and credibility of their commitment. This will be done in three basic stages. Through impact analysis, the bank will review its main activities to identify significant positive and negative impacts for the people and environment where it does its business. The bank will then set ambitious targets to reduce significant negative impacts and increase positive impacts. There should be milestones for effective monitoring and measurement. Finally, the bank must adapt a reporting and self-assessment template to keep track of its progress. This is to demonstrate accountability.
The principles guide banks by way of a comprehensive framework, at the strategic, portfolio and transactional levels. It aims to enable the bank to seize new opportunities in an emerging sustainable development economy. It likewise should strengthen trust in the bank as it remains responsive, relevant and competitive while improving its value addition to customers, investors and society.
Because this is a collaborative effort of the UNEP-FI, knowledge, experience and expertise will be shared with tools and resources to be made available to the participants. UNEP-FI will conduct activities for knowledge sharing and publish materials that can be useful to the interested participant.
The principles have been endorsed by 132 official “Signatory Banks” and launched by UNEP-FI in September 2019. While the Development Bank of the Philippines is the sole Philippine signatory in this recent exercise, we believe this set of principles should be seriously considered by other local banks. Our country needs a pro-active banking industry willing to collaborate for a common good if we want to build the future that our children deserve. We have to collectively manage the emerging risks associated in servicing this volatile, uncertain, complex and ambiguous world.
As the UNEP-FI advocates, the imperative is to finance change and change the way we do finance. This means cultivating a breed of responsible bankers who will participate in building a global sustainable development economy.
Benel D. Lagua is Executive Vice President at the Development Bank of the Philippines. He is an active FINEX member and a long time advocate of risk-based lending for SMEs. The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX.