TOPIC 3

What is Sustainable Finance?

What is Sustainable bank?
 What are we going to analyze?
In the Topic 3 - Main skills/competences targeted: Financing in a sustainable way

• How to built a sustainable finance: rules and framework

• Why do banks exist?
• Sustainable banking: a stakeholder approach
What is « Sustainable Finance»?

Our contribution

New financial research - 16 academics and Professional experts

have converged in « Sustainable finance: a new finance for the
21st century?” (book published in sept. 2011)

Book supported by French Professional Banking Organization –

FBF - Directed by Dhafer SAIDANE and Pascal GRANDIN –SKEMA
Business School

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Turgot PRIZE in 2012

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 The 5 RULES OF SUSTAINABLE FINANCE

1. RESPONSIBLE - Responsible finance for Planet and People and a

response to the financial crisis.
2. USEFUL - Understandable by everyone, transparent and must serve
growth (traceability) linked to the real economy and customers
satisfaction (useful and not complex ...)
3. SAFE - Based on a calculated risk that does not threaten systemic
stability. It reflects the need for security and stability of economic actors.
A contribution to the stability of the financial system.
4. PROPER - Based on a good governance to ensure the production of
traceable financial products.
5. ALTRUISTIC - A long -performance and return respectful of inter-
generational welfare
 THE SUSTAINABLE FINANCING FRAMEWORK
« the magic Box »
New financial Financing sustainable Close to people, No rejection of the
approaches and new & Green growth friendly and conventional finance
individual behaviors performant but less excess
and mindset
Ethics is a key point. Sustainable Banks This Finance is Sustainable finance is
The traditional finance fund long-term respectful of human trying to correct the
has separated finance “Green dignity. Microfinance, major failure of
and the ethics. This Business”/Climate for example, seeks to conventional finance
separation is a major change with Customer manage social that is excess of:
weakness of satisfaction and satisfaction and Return, profit,
conventional finance. seeking for Stability of financial performance. interest, bonus,
It arises from a false the financial system. Finance should be consumption,
conception of transparent and expense...
rationality in finance. traceable.
 Conventional Finance vs Sustainable Finance
The 4 Principles of Sustainable finance

Principle n°1 Principle n°2 Principle n°3 Principle n°4

Ethic Sustainable Performance Less excess
development

Conventional
Finance No No Yes No

Sustainable
Finance Yes Yes Yes Yes

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 Shiller, R. J. (2013). Finance and the good society. Princeton: Princeton University Press.

Robert James Shiller is a successful American economist,

academic, and writer. He is a professor of economics at Yale
University.

MINDSET SHIFT

Benedikter, R. (2011). Social banking and social finance. In R. Benedikter (Ed.),

Social banking and social finance (SpringerBriefs in Business). New York: Springer.

• Shift toward social finance can be considered part

of a mindset shift under the influence of the crisis.

• It’s a new “financial humanism” taking the form of a

Roland Benedikter is Co- responsibility for sustainable development in the
Head of the Center for
Advanced Studies, UNESCO social and environmental spheres
Social /Sustainable finance

Set of values that gives priority to

1. ethical
2. ecological choices,
3. social utility,
4. public interest,
5. local development,
6. long-term returns over short-term profit maximization
 The role of Banks/financial markets in an
economic system
International
markets
Financial markets and
Banks play a key role in Imports Exports
the economy Government

Taxes Investments
Banks/Financial
Market
Savings Investments
Consumption
Households Companies
Production
 We need « sustainable » Bankers more than Banks
SKILLS
Intelligence Central Agency

Balance Sheet
Assets Liabilities

Loans Deposits
Risk of Default Risk of liquidity
Asymetry of information
Asymetry of information

Risk of transformation
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Why do banks exist?

1.Theraison d’être of banks is explained by the existence of friction in capital

markets (Saunders, 2000; Hubbard, 1994; Freixas and Rochet, 1998).

2.Thesefrictions arise due to insufficient information and knowledge on

households and businesses (asymmetry of information).

3.Theintermediary role of banks consists of bringing together the surpluses

(Households=Depositor) and deficits (Business=Borrower) of money in an
economy through matching lenders and borrowers.

4.Banks must screen borrowers and monitor loans.

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Bank 1. General:
functions 1. information services (reducing savers’ monitoring costs);
2. liquidity services (increasing savers’ liquidity);
3. price-risk reduction services (diversification, brokerage
and asset-transformation);
4. transaction-costs-reducing services (economies of scale
through pooling).
2. Institution-specific:
1. money supply;
2. credit allocation (between sectors);
3. intergenerational transfers;
4. payment services
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 Country % of total % of total % of total Bank assets, Equity
GDP bank assets equity % of GDP capitalization,
capitalization % of GDP
Financial sector in developed countries Iceland 0.0 0.0 0.1 62 219
Luxembourg 0.1 1.9 0.0 3461 70
1. The first three columns show the country’s New Zealand 0.2 0.2 0.1 125 55
position in relation to the total of all Ireland 0.4 0.5 0.2 241 59
developed countries in terms of GDP, bank Portugal 0.5 0.7 0.2 218 60
Greece 0.5 0.2 0.7 66 163
assets and equity capitalization. Finland 0.6 0.4 1.5 102 367
Norway 0.7 0.4 0.2 88 41
Denmark 0.8 0.6 0.3 108 63
2. The last two columns show the size of the Austria 0.9 1.6 0.1 234 13
banking and equity markets in each country Sweden 1.0 0.8 1.2 109 159
in relation to their GDPs (Market Based/Bank Belgium 1.1 2.3 0.3 294 41
Switzerland 1.1 3.5 2.2 433 257
Based). The Netherlands 1.7 3.1 2.5 267 196
Australia 1.7 1.3 1.3 111 106
3. The countries are ranked according to their Spain 2.5 3.0 1.2 160 61
Canada 2.7 2.0 2.5 114 121
share of total developed countries’ GDP, Italy 5.2 5.0 1.9 134 51
starting with the country with the smallest United Kingdom 6.1 7.9 9.4 223 201
France 6.3 12.2 5.0 270 108
GDP. Germany 9.3 13.8 4.0 205 58
Japan 18.1 20.9 15.2 137 108
4. This allows the three largest economic zones United States 38.5 17.5 49.8 70 166
Total 100.0 100.0 100.0
at the end of the table – the US, the EU and EU-15 36.9 54.1 28.6 201 105
Japan – to be compared easily. EMU-12 29.0 44.8 17.7 214 81
 Rank BANK Total asset Country
1 Industrial and Commercial Bank of China Limited $5.5 trillion China
Biggest banks in 2 China Construction Bank $4.7 trillion China
3 Agricultural Bank of China $4.5 trillion China
the world, as 4 Bank of China $4.2 trillion China
5 JPMorgan Chase $3.3 trillion United States
measured by 6
7
BNP Paribas
China Development Bank
$2.9 trillion
$2.69 trillion
France
China
total assets, 2023 8
9
Bank of America
Mitsubishi UFJ Financial Group
$2.5 trillion
$2.35 trillion
United States
Japan
10 Crédit Agricole $2.34 trillion France
11 Sumitomo Mitsui Banking Corporation $2.06 trillion Japan
12 Postal Savings Bank of China $1.97 trillion China
13 Japan Post Bank $1.97 trillion Japan
14 Bank of Communications $1.91 trillion China
15 Banco Santander $1.8 trillion Spain
Total Size of Top 36 Banks 16 Wells Fargo $1.8 trillion United States
in the World = $74 trillion 17
18
Groupe BPCE
Mizuho Financial Group
$1.7 trillion
$1.7 trillion
France
Japan
(World GDP $100 trillion) 19 Citigroup Inc. $1.66 trillion United States
20 Société Générale $1.66 trillion France
21 UBS + Credit Suisse $1.6 trillion Switzerland
22 Deutsche Bank $1.49 trillion Germany
Threat or chance for the 23
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China Merchants Bank
Barclays
$1.45 trillion
$1.43 trillion
China
United Kingdom
Global stability? 25 Toronto-Dominion Bank $1.40 trillion Canada
26 Royal Bank of Canada $1.37 trillion Canada
27 Industrial Bank (China) $1.35 trillion China
28 Shanghai Pudong Development Bank $1.27 trillion China
29 HSBC $1.26 trillion United Kingdom
30 China Citic Bank Corporation Limited CNCB $1.26 trillion China
31 Intesa Sanpaolo $1.21 trillion Italy
32 The Agricultural Development Bank of China $1.14 trillion China
33 China Minsheng Bank $1.09 trillion China
34 ING Group $1.08 trillion Netherlands
35 UniCredit $1.04 trillion Italy
36 Bank of Nova Scotia $1.04 trillion Canada
 Which Storytelling could we compose starting from those
concepts ?

1. « Big is Beautiful »
2. « Too Big to Fail »
3. « Lender of Last resort »
4. « Hostage of Bankers »
5. « Moral Hazard »
 •The revoking of the McFadden Act (1927) in the US
in the 1980s proved a strong stimulus to the cross-
In the US: state merger process.
•The Glass Steagall Act (1933) also prohibited
the effect of activities in US like joint ventures between banks
regulation and insurers, thus causing institutions to become
powerful specialists, particularly in the field of
investment banking (about seven of the top ten
investment banks in the world are American,
though this is also due to the enormous capital
markets in the US).
•The Gramm Leach Bliley Act of 2000 changed this,
and allowed for far-reaching collaboration between
banks, insurers and brokerage firms. Since then, a
trend towards more universal financial institutions
has emerged.
 A sustainable bank

- It should be suitable for this shifting world.

- It should attempt to ensure a strong ecological transition.

- It should respect not only its Shareholders but also all the stakeholders.

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 The stakeholder Theory

1. The stakeholder theory is a theory of organizational management ethics.

2. It was developed by Edward Freeman in the book Strategic Management: A

Stakeholder Approach (1984).

3. It identifies the groups which are stakeholders of a corporation.

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Internal and external bank stakeholders

Competitors Media

Suppliers
Employees NGOs

Board of
directors Shareholders
Customers
Bank Other financial
institutions

Governments Society
 • Firstly, all pollution caused by companies who
Two extreme are financed by banks is the responsibility of the
standpoints on the banks. It is easy to estimate the environmental
environmental burden in this sense: it would equate to the
responsability of aggregate pollution of a major part of the
bank products. economy in many countries.

• Secondly, as the products of banks do not

pollute in themselves, the users of those
products – the clients – should take sole
responsibility for the pollution they create.
Of course, both standpoints are absurd. The truth lies somewhere in the middle but still
remains almost difficult to quantify.
Do banks inhibit the Do the financial markets encourage a
drive towards short-termist, profits-only mentality
sustainability? that ignores much human and
environmental reality?

Based on interviews with various stakeholders within the financial sector,

Schmidheiny and Zorraquín find no convincing evidence to indicate that
banks block sustainable development.

Schmidheiny, S and FJL Zorraquín, with the WBCSD (1996), “Financing Change: The Financial Community,
Eco-Efficiency, and Sustainable Development”, MIT Press, Cambridge, MA

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 1. In the interviews the answers given are intended to be socially
Nevertheless, this acceptable rather than sincere always arises.
conclusion is open
to debate. 2. The environment as a factor is not incorporated into investment
decisions
3. An investment in factory A that discharges effluent into a river legally
but without purification yields a higher return than an investment in
factory B which has introduced costly water treatment technology.
4. Factory A would also be able to raise cheaper funds than factory B. If
government environmental policy is passive and unchanging, profit-
maximizing banks will provide financing for environmentally unfriendly
investments at lower than ideal interest rates from an ecological
standpoint.
5. This viewpoint shows that short-term profit maximization impedes the
attainment of a sustainable society.
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environmental risks 1. Up to the 1990s, banks did indeed concentrate primarily on the
are not seriously environmental risks that relate to government policy. These risks
perceived were not as serious as they were initially perceived to be.

2. The power of consumers in Western countries has been growing

since the mid-1990s. This has increased the scope of environmental
risk.

3. It no longer matters whether or not a factory is releasing pollution

legally, but whether or not people are still willing to buy the
products of the company concerned.

4. Risks to banks’ reputations are also playing an increasingly

important role. 25
The defensive banking. The bank contests every government measure
with respect to the environment and sustainable development since its
self-interest is threatened. In this vision, care for the environment only Sustainabl
adds to costs and there is certainly no money to be earned from it. e banking
Although there are no banks in developed countries that maintain this
vision anymore, this stance is still present among certain individuals or
disciplines within banks. Offensive
Banking
The preventive banking. These cost savings is related to an internal
environmental care (eg paper use, energy and water use, and business
travel). They also have an external character (with respect to the Preventive
products involved in banking, such as loans and savings products) Banking
purely in the sense of limiting risks and investment losses related to
environmental
risks.
The offensive banking. Banks see new opportunities such as the
development of environmental investment funds (such as the Calvert
Defensive
Social Investment Fund and the Eco-Performance-Portfolios of UBS), the Banking
financing of sustainable energy (such as the so-called Solaris Project, a
collaboration between Greenpeace and the Rabobank Group
Sustainable banking. All activities at this stage are sustainable thanks to a consciously
chosen policy to that effect. These banks have the ambition to operate sustainably in
every respect.
1. Sustainable banking can be defined as a modus operandi in which the internal
activities is sustainable and in which the external activities (such as lending and
investments) are focused on sustainability among customers and other entities in
society.
2. The starting point is not environment regulations or the market as such, but the
vision regarding the environment, the organization’s goal and the role that the
organization wants to play in society.
3. These banks are prepared to accept lower margins and/or higher risks to stimulate
certain activities that do not have a chance of succeeding in the current paradigm
because the risk is considered to be too large, the profit margins too low.
4. Some examples: Triodos Bank in The Netherlands or The Co-operative Bank in the
UK
How to develop a comprehensive strategy for ESG factors in a bank?

Bank (1)
Assets Liabilities

Loans (2) (3) (4) Debt (deposits, bonds…) (5)

Equity (6)

P&L Profit and loss statement (7)

(1) Consideration of sustainability in the banking business strategy and the organizational system/governance
(2) Identification/classification of sustainable assets
(3) Reporting of ESG risks and their impact
(4) Consideration of ESG (risk) in pricing & risk management
(5) Refinancing with sustainable instruments
(6) Consideration of ESG risks within the capital
(7) ESG & extra-financial Data Management
Micro-credit or micro-
financing are examples of
sustainable banking
Banks via Micro-credit can in developing
countries make a contribution to
sustainable development by financing and
facilitating sustainable energy.

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In short, banks • as investors, supplying the investments needed for
interact with the achieving sustainable development;
environment in a • as innovators, developing new financial products to
number of ways stimulate sustainability;
• as valuers, pricing risks and estimating returns, from both
a financial and an environmental perspective;
• as powerful stakeholders, influencing governments and
the management of companies as lenders and
shareholders of companies;
• as polluters, polluting the environment by their own
internal processes and use of resources;
• as victims of environmental changes, eg climate change.
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SRI • Sustainability and banking are linked to sustainable
investing, also known as socially responsible investing
(SRI).

• SRI is an investment made in a limited group of more

sustainable sectors or companies

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Active investing involves a fund Negative screening :
manager choosing investments, investing in companies that
whereas passive investing tracks score poorly on
an existing group of investments SRI Universe environmental, social and
called an index. governance (ESG) factors
relative to their peers.
Passive investing strategies often
Active Approche Passive Approche
perform better than active
Positive screening :
strategies and cost less. investing in companies that
score highly on
Negative Positive environmental, social and
Screening Screening governance (ESG) factors
relative to their peers.

Thematic Best in
Shareholder engagement/ Funds Class
Shareholder Activism

The best-in-class : investin

Thematic funds are investment in companies that are leader
funds that are focused on specific
themes or trends, such as clean
in environmental, social and
energy or technology. governance (ESG) criteria.
SUSTAINABLE
BANK Sustainable bank refers to financial
institution that priorities environmental,
social and governance (ESG) factors in their
operations and investments
 How to define sustainable bank?

1. Customer/ ecological environment satisfaction,

2. No excessive profitability
3. Contribution to the stability of the financial system.

The Sustainable Bank = strong financial business + performance +

responsibility towards society + long-term financing.

It is the antidote to the systemic financial crisis.

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 social / sustainable bank

1. Alternative,
2. Ethical
3. Green
4. ValueS-based (Finance/Human/Nature)
5. Contribute to the development of people and the planet
today and in the future
What did we learn from the lesson (TOPIC 3)?
Identify and restore the points retained from the course.

1. How to built a sustainable finance: rules and framework

2. Why do banks exist?
3. Sustainable banking: a stakeholder approach