We are currently seeing a shift in momentum in how people view the role of the banking sector. We have seen non-governmental organisations and customers campaigning for banks to play a role in the move towards a more sustainable world.
Now, regulators are consulting on the role of banks in tackling climate change — including managing the risks to their own financial stability — and a cross party group of MPs have announced the intention to examine the Social Purpose of Banking.
There is a financial need to make this transition: the risks to global GDP posed by climate change were high on the agenda at the recent World Economic Forum annual meeting. In order to maintain stability, banks must act now to divest from their exposed assets, such as fossil fuels, and invest instead in established alternatives, as well as the innovative and forward-thinking solutions that entrepreneurs, sustainable organisations and SMEs are providing us with.
Amidst a range of environmental and social challenges, we are becoming increasingly aware that all actions matter. Conscious consumers and values-driven businesses are making more sustainable choices, whether that be in reducing plastic waste, switching energy supplier or buying organic produce. Many now realise that their savings and investments can play a similarly crucial role in addressing issues and that they can demand to know where their money is going.
By and large, traditional banks have chosen to lend the money that has been invested with them to the person or organisation that will maximise the bank’s profits. This needs to change to a model whereby banks use the money entrusted to them to generate a fair profit, while considering whether the money is used in the long-term interests of those customers who deposit money.
While challenger banks and fintechs can offer new innovative customer-centric banking, they are also in a position to bring change to the wider banking system. Specialist banks shouldn’t just be challenging the established players for market share, they can question the foundations of the industry, and give customers a choice about saving or investing for positive change.
Last month, the All-Party Parliamentary Group on Fair Business Banking in the UK gave its backing to the United Nations Environment Programme Finance Initiative’s Principles for Responsible Banking. It also launched a new workstream to examine how UK banks can adopt the principles and redefine their social purpose.
The ambitious new principles, currently at a global public consultation stage, provide the banking industry with a framework to embed sustainability at the heart of its operations. By complying to these principles, banks align their business strategies with the most important societal goals, such as combating climate change and developing sustainable food systems.
Transparency and accountability are an important part of the initiative. Banks that sign up to the principles must consult their stakeholders about impact themes for the coming years. Banks will publicly set targets and report on their progress.
The principles can support the transition banks need to make towards a sustainable business model. This journey will be difficult at times, but have a hugely important role in the transition to a more sustainable economy and society. Every financial decision has an impact and banks should have a responsibility to determine whether that impact is positive or negative.
All banks should endorse and sign up for the principles, no matter what their starting point. The more banks that do, the greater impact the banking industry will have in leading society to meet its goals for a sustainable, equitable and prosperous future.
Imagine if banks didn’t just compete to be the best in the world, but the best for the world. It is a vision that we have at Triodos, and we hope more will join us.
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