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Banking for Sustainability: The Policy,

Regulatory and Financial Case for Action

Article June 2016

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Thought Leadership By Dr. Adam Ng

Banking for
Sustainability
The Policy, Regulatory
and Financial Case
for Action

business-as-usual cannot get us

to sustainability or secure economic
and social prosperity; these can be
achieved only through radical change,
starting now. To play its role, business
will still need to do what business
does best: innovate, adapt, collaborate
and execute. These activities will
change along with the partnerships
that we form with other businesses,
governments, academia and non-
governmental organisations in order to
get it right for all.

The co-chairs of the World Business

Council for Sustainable Development
(WBCSD)s Vision 2050: The New
Agenda for Business

46 | BANKING INSIGHT | june 2016

I
n todays increasingly challenging era,
the financial sector has a significant
role in catalysing the global transition to
sustainable development and shared prosperity.
Sustainability can be practiced from the inside
(financial institutions internal operation) to
the outside (financial institutions financing
and investment). Yet, can banks do well while
doing good? Does a bank that improves its
economic, environmental, social and governance
performance increase, decrease, or leave
unchanged its financial performance? Is the
banking sector up to the challenge as the
steward of long-term capital, preserving and
enhancing different types of capital in the value
creation process?
Lets discuss three propositions. First, there
is opportunity for banks, particularly Islamic
banks, to finance and invest in corporations that
adopt robust sustainability practices. Second,
regulators and central banks can address
environmental risks and fund sustainability.
Third, the ecosystem needs a new sector of
organisations at the intersection of the public,
private, and social sectors - the emerging fourth
sector to offer sustainability advisory and
technology services to banks and corporations
striving to make an organic difference.

Opportunity for Banks

The opportunity for banks emanates from
the strong economic relevance of sustainability
parameters for corporate management and
for investors. A study conducted by University
of Oxford and Arabesque Partners in 2014,
From the Stockholder to the Stakeholder:
How Sustainability can Drive Financial
Performance, shows that solid environmental,
social and governance (ESG) practices result in
lower risk and better operational performance
of firms. Stock price performance of firms is

The ecosystem needs a new sector

of organisations at the intersection of
the public, private, and social sectors
- the emerging fourth sector to offer
sustainability advisory and technology
services to banks and corporations striving
to make an organic difference.

june 2016 | BANKING INSIGHT | 47

Thought Leadership Banking for Sustainability: The Policy, Regulatory and Financial Case for Action

positively affected by good sustainability the Islamic finance industry and socially initiatives such as becoming signatories
practices. Firms with good sustainability responsible and sustainable financing and to the Equator Principles and Principles
standards have significantly lower cost investment. Among the initiatives are: for Responsible Investment, Global
of capital and better access to capital. The USD500 million Immunisation Reporting Initiative and Carbon Disclosure
Indeed, according to the Cambridge Sukuk (2014), Project, publishing sustainability reports,
Institute for Sustainability Leadership, The Green Sukuk and Working measuring their impact on carbon
many companies are using sustainability Partys (Clean Energy Business footprints and having impactful CSR
as a strategic lens, translating it into Council (MENA), Climate Bonds initiatives (e.g. environment).
product and service opportunities, Initiative and Gulf Bond and Sukuk Islamic banks should therefore seize
productivity and innovation potential, Association) development of Islamic the opportunity to build dedicated capacity
bottom-line savings, reputational and financial products to invest in to serve the social and environmental
market growth, and license to operate. climate change solutions (2013), priorities of their clients. First, in terms
There are banks that aim to help people, The USD225 million Ihsan Sukuk to of internal capability, culture and
businesses and the planet prosper in the fund the improvement of education performance, it is important to improve
conventional financial space. In 2014, in Malaysian Government schools data analytics technology and skills in
Banco Santander reported that 55% of that was approved by the Securities sustainability risk management, as well
its employees are women and 10.49% of Commission Malaysia SRI Sukuk as to integrate sustainability to enhance
staff have been promoted, with 59,569 Framework (2014), banks internal operational performance
volunteers in social initiatives involving The launch of the first Shariah- and reputation. Second, with regard to
the community and over 10,000 ideas compliant funds based on ESG operational best practices, Islamic banks
gathered on how to improve the bank. principles: SEDCO Capital Global could contribute to and adopt local and
Overall satisfaction among customers was Funds (2013) and BIMB-Arabesque i global perspectives on best practices
85.3%. 314.1 million worth of loans were Global Dividend Fund 1 (2015). for sustainability risk management and
given to micro-businesses and 187 million The contribution of almost 20% reporting. Third, on financing and investing
was invested in the community, 78% of (USD80.78 million) by the Islamic solutions, Islamic banks could strengthen
which was spent on higher education. finance sector in Malaysia of originating, structuring, distribution and
As leaders in financing and promoting financing for projects under advisory capabilities to meet demand for
renewable energies, Santander tracked a Malaysias Green Technology high impact and innovative financing and
4.8% overall reduction in CO2 emissions Financing Scheme over 2010-2015. investing solutions. They could also set
and an 8.3% global reduction in paper Yet, there is still a gap. Globally, Islamic up and manage Shariah-ESG compliant
consumption within its internal operations finance is not considering the wider risks, funds from global asset portfolios. Fourth,
relative to the year before. such as social and environmental, but thought leadership could be developed
Triodos Bank is another case in point. focusing mainly on credit and market risks. through research and insights on key
Triodos invests only in businesses and real Islamic banks are lagging behind in global sustainability trends, strengthening banks
economic activities that create a positive
impact on the planet. The bank doesnt
invest in complex financial instruments
and managed to withstand headwinds
and even grow through the global financial
crisis. In fact, its balance sheet structure
resembles that of an Islamic bank. With a
presence in five countries and expanding
across the globe, Triodos inculcates
investor and partner relationships with
customers and gives full transparency to
customers to ensure alignment of values
between their depositors and borrowers.
It encourages co-owning the bank, and
there is even a save and donate product to
infuse charity into its business model.

Islamic Finance and

Sustainability
In recent years, serious attempts have
been taken to foster the link between

48 | BANKING INSIGHT | june 2016

 leadership role in global initiatives, engaging applying more favourable regulatory treatment
with regulators on links between stability and to green asset-backed securities (e.g. rediscount
sustainability, and becoming active owners these instruments under specific criteria).
and influencing the management of invested In this respect, central banks can fund
companies. sustainability in at least five ways as advocated
by Tan Sri Andrew Sheng, a well-regarded former
The Role of Regulators financial regulator in Asia and a member of the
While facilitating market development, UNEP Advisory Council on Sustainable Finance:
regulators and central banks should also address factor social objectives into central banks
environmental risks and fund sustainability investment decision-making;
because the environment and financial system develop targeted monetary policy measures
are both public goods. According to Lloyds, an (e.g. Peoples Bank of Chinas consideration
acute disruption to global food production may to accept high-quality green assets from
result in the main European stock markets losing banks as collateral for liquidity support);
10% of their value and US stock markets 5%. participate in the United Nations Principles
Recognising the significance, several national on Responsible Investing and the
authorities in emerging markets (e.g. China, Sustainable Banking Network (at present,
Peru, and Brazil) are already addressing the Many only four OIC member countries central
financial stability-environmental risk nexus in their companies banks from Bangladesh, Morocco, Nigeria,
regulatory frameworks. and Pakistan are part of the Network);
are using
The Cambridge Institute for Sustainability provide seed funding to existing and future
sustainability
Leadership and the United Nations Environment national and global sustainability initiatives;
Programme (UNEP) Finance Initiative report in
as a strategic support the implementation of a financial
2014 claims that there is flexibility in Basel III for lens, transaction tax, which could fund a global
regulators and bank risk management to address translating it environmental or sustainable development
financial stability risks related to environmental into product fund; and
risks. The report shows that three approaches can and service incentivise bankers, asset managers and
be taken to reflect environmental risks in banking opportunities, the corporate sector to invest in, or finance,
regulation and policy: productivity sustainability activities.
understanding implications of social and and innovation
environmental factors through better potential, Building Capacity in the Emerging
research; Fourth Sector
bottom-line
promoting integration of environmental and The third proposition pertains to the availability
savings,
social factors in risk management at the of sophisticated sustainability advisory, research
transactional level and corporate governance
reputational and technology services firms that can work with
through guidance and prudential regulation; and market organisations to enhance the understanding of
and growth, and material sustainability issues for their business.
stimulating finance/investment into sectors license to This can be done through the quantification of
and companies that are the root causes of operate. sustainability indicators that impact organisational
environmental or social risks by adjusting strategy, operations and financial performance
incentives and requirements. based on established and advanced tools and
The report proposes that the Basel Committee methodologies. Ultimately, helping organisations
should focus on the internal capital adequacy to create value for all major stakeholders
assessment process and supervisory review via impactful evidence-based strategies and
evaluation process (Pillar 2: Supervisory review initiatives will become the new driver for
process) as well as standardised or harmonised business in this increasingly challenging age of
disclosure of information about exposure to, sustainability. Q
and management of, systemic environmental
risks (Pillar 3: Market discipline). This is because n Dr. Adam Ng, Assistant Professor at INCEIF
regulatory capital and liquidity requirements and Research Associate at the Oxfords Global
(Pillar 1) have a marginal influence on the banks Economic Governance Programme, specialises in
decision to finance environmentally-friendly industry and academic research on sustainability.
activities, and lowering capital and liquidity This article is based on his presentation at the
requirements may lead to arbitrage and poor 22nd Annual World Islamic Banking Conference (2
incentives for banks. Regulators can also consider December 2015, Manama).

june 2016 | BANKING INSIGHT | 49

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