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In 2010, The Royal Bank of Scotland (RBS) was under fire for its questionable investments in various unsustainable projects. Campaigners and leading ethical investment experts pointed out that the move to more environmentally and socially sustainable management became ever more crucial for RBS as it had been suffering from over 90% fall in market value over the last five years.
Experts further noted that as one of the banks providing bailouts, RBS needed to consider long-term social and environmental ramifications of its lending practices, especially considering that the UK taxpayers owned over 84% of its market shares. The public viewed that RBS was duty-bound to their needs for better social and environmental policies.
The massive hit to the bank’s reputation was a major wake-up call. Fast forward to 2018, RBS announced that it would no longer fund Arctic oil projects and pledged to slash lending to firms profiting from fossil fuels.
The example above is one of the myriad stories of how sustainability is no longer an option for financial institutions. The eco-apartheid mindset where humans are ecologically disparate from nature has rapidly been phased out with new, enlightened thinking that the balance between the human ecosystem and nature plays a major role in business profitability.
The global financial crisis in the late 2000s was the major turning point for banks and financial regulators to engage in more holistic community building and sustainable developments on national and international scales.
However, new challenges crop up.
The uptake of sustainability is not evenly observed across the financial industry.
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There are three significant challenges that prevent banks and other institutions from attaining sustainable finance.
1. Irresponsible Lending Practices
The lack of oversight in sustainable lending practices is one of the critical issues plaguing the financial sector. While many players in the industry have shown interest in sustainable corporate strategy, the commitment doesn’t fully translate to how and whom they provide their financial products and services.
For example, some banks are still financing and investing in activities that contribute to environmental destruction, such as off-shore oil extraction, palm oil operation, and gold mining.
Mitigating this problem requires a concerted effort from the government and financial regulators to create a legal framework to push banks to take more responsible lending decisions.
On the flip side, banks must also establish a rigorous loan review process to filter out questionable lending portfolios.
This can be proven beneficial to banks as a more thorough lending process decreases the chances for reputational damage and future financial losses due to liabilities.
2. Failing To Address Public Expectations On Better Sustainability Practices
In the age of seamless connectivity, financial institutions are now dealing with a new breed of investors and customers who are well-versed in environmental and social issues. To bolster their brand value, financial institutions must aptly demonstrate and communicate their sustainability policy.
However, some financial institutions fail to meet their sustainability commitments due to improper planning and misalignment between their core business models and sustainability strategies. Such a failure in corporate governance may lead to loss of trust by stakeholders and regulators.
Therefore, it is essential for financial institutions to establish beforehand the key objectives of what long-term sustainability initiatives that they can feasibly and consistently undertake with their existing instruments and capitals. Financial institutions must also be aware of the customers and business partners, with which they are affiliated so that their business decisions are always in tune with their sustainability planning.
Inconsistencies in narratives will also lead to public distrust and suspicion.
3. Bribery and Corruption
Fund misappropriation undermines the effective implementation of sustainable development. Corruption and bribery prevent vulnerable communities from receiving proper access to better infrastructure, increase wealth inequality, and hamper economic growth.
UNDP (United Nations Development Programme) reported that approximately US$1 trillion are paid in bribery annually and US$1.8 trillion in illicit financial transactions flowing from Africa in the span of almost four decades since 1970.
Although in most scenarios, banks are just collateral instruments in such a crime, the inadequate anti-bribery and corruption measures in the financial sector, especially in the emerging markets, may unknowingly let a plethora of such transactions go under the radar. But emerging markets aren’t the only markets where this transpires.
The Financial Services Authority (FSA) of the UK in 2012 found out that almost half of the 15 banks it visited for spot inspections had an insufficient anti-bribery and anti-corruption risk assessment.
The FSA also reported that some senior managers possessed inadequate knowledge in corruption law.
To clamp down the number of illicit transactions, banks must perform regular due diligence on their anti-bribery and anti-corruption measures. On enhancing corporate transparency, banks must also conduct sustainability reporting that outlines their endeavours in combating racketeering and fund mismanagement through measurable and scalable social metrics.
The Next Step
Integrating sustainability practices in a bank’s corporate structure is not an unassailable quest. Nevertheless, there are proper steps that must be followed. PwC in its report on sustainability for banks had formulated the following steps:
The first important step is to define what sustainability means to the financial institution, which includes assessing the materiality of all sustainability areas from the environmental impacts to corporate governance.
The next step is to engage stakeholders with the sustainability plan. This part allows the company to align its sustainability strategy with its core business and helps understand the expectations of the stakeholders of what the company can achieve.
On the third step, the company can now start setting up its key objectives and goals. At this step, the company must take into consideration how a newly introduced set of sustainability values can affect the entire process and outcomes of its value creation.
The fourth step follows shortly after. This particular step is all about establishing the systems and processes that can help the company plan in greater details the sustainability initiatives it can handle, which also include the KPIs and benchmarks. Internal and external collaborations are strongly encouraged to guarantee the success of its sustainability efforts.
The last and final step is to measure and gauge the success rate of each initiative. This step allows the company to track the progress of its sustainability practices and recalibrate areas that need improvements based on the KPIs and benchmarks created in the previous step. The company also needs to communicate its actions with stakeholders to find out whether its endeavours have met their expectations.
This whole process can be repeated, be it to introduce a new strategy or to adjust to the changing market.
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