Strategy: Understanding why do it and what to focus on
Understanding how an emphasis on sustainability can improve your business is a key consideration for all organisations. Some reasons why financial companies are choosing to deliver sustainability include new market opportunities, brand and reputation, saving or making money, regulation, risk management and stakeholder pressure. In reality, there may be a number of drivers to consider when developing your business case.
1. Ask people what they think is important.
This is important because you need to understand what your customers, investors and other stakeholders expect of you. This understanding will enable you to develop an approach that reflects all stakeholders’ priorities. The process of engaging stakeholders is also beneficial. By involving key players from the start, you can help to raise awareness, educate, overcome cynicism and create greater support for the identified solutions. In your discussions with your stakeholders you can also begin to identify an appropriate set of qualitative and quantitative performance indicators.
Consider talking to senior managers, employees, customers (often the forgotten stakeholder, but crucial if your aim is to influence them or if you want them to use your products/services), government agencies (particularly financial and environmental regulators), non – government organisations, shareholders, investment analysts (including socially responsible or ethical investors) and trade associations.
More information on engaging stakeholders can be found in the Partnerships & engaging others module.
2. What external help is available?
Signing up to an international or national framework or standard can add credibility to your sustainability programme as it will ensure you are addressing issues in a way that is generally regarded as effective. It also indicates to your stakeholders – internal and external – that your approach is aligned with best practice. Your participation may also provide preferential access to valuable guidance, data sources, best practice research, contacts or reviews.
Key frameworks that financial organisations should consider include:
|
Framework
|
Bank
|
Insurance company
|
Asset manager
|
|
X
|
X
|
X
|
|
|
X
|
|
|
|
|
|
|
X
|
|
|
X
|
|
|
|
|
X
|
|
|
|
|
X
|
X
|
X
|
|
|
FORGE
|
X
|
X
|
X
|
|
|
|
X
|
|
|
|
|
X
|
|
|
X
|
|
X
|
|
|
|
|
X
|
|
|
|
|
X
|
|
|
X
|
X
|
X
|
|
|
X
|
X
|
X
|
|
|
X
|
X
|
X
|
|
|
X
|
X
|
X
|
|
|
X
|
X
|
X
|
More details on these initiatives can be found in the useful guidance section.
Are there key considerations we haven't included? If so, please let us know.
Deciding which issues you should focus on
A key challenge is understanding the most appropriate way that your organisation can contribute to sustainability, it would be a mistake to try to cover every aspect of sustainability across the entire business. Consultation with individuals internal and external to the organisation will help you identify those issues that fit best with your core business. There are a number of issues specific to the finance sector that you may need to consider including the following.
- Mis-selling - Ensuring products and services are designed to meet the needs of identified consumer groups and sold in a clear and transparent manner. High profile cases of mis-selling in the past have led to a loss in trust. This has clear implications for brand value.
- Managing Debt - Companies are expected to lend responsibly to help customers avoid accumulating unmanageable debts. This approach also reduces credit risk.
- Sustainable products - Companies have the opportunity to invest in more sustainable solutions. For example, clean technologies, green accounts or insurance policies, or ethical investments. You may need to ask, where is the competitive advantage for your organisation? What is happening now that could be opening up new markets in the future?
- Access to financial services - Access to basic financial services, particularly amongst poorer communities and customers is seen by some as a fundamental duty of financial organisations. Innovative products and services, designed in way that meets the needs of new customers, could lead to increased market opportunities.
- Project financing - When providing funds for major development or commercial projects, companies should consider the wide range of social and environmental issues, particularly when lending to projects in emerging markets. These are addressed by initiatives like the Equator Principles and the United Nations Environment Programme Finance Initiative. Incorporation of social and environmental standards will enhance the robustness of the project and assist in timely management of risks.
- Sustainable lending - Many banks are considering social and environmental risks or opportunities within all lending decisions, not just project finance.
- Fair pricing – Making sure charges are appropriate and affordable is a key sustainability issue. This is especially true of insurers who could end up setting premiums that are prohibitively high for perceived ‘high- risk’ customers such as those on flood plains at risk to a change in climate or in developing countries. Clear communication on pricing is a key element of this.
- Micro-finance – There is a rising expectation for banks to provide small scale loans to people who would not qualify for traditional banking credit. This is often the only way they can establish a business and lift themselves out of poverty. This is a dynamic, growing market which could have long-term commercial potential.
- Money Laundering – The globalisation of financial services and concerns about organised crime and the funding of terrorism mean that financial organisations must be vigilant against money laundering, bribery and corruption.
- Climate change – Companies need to ensure that they are part of the solution to climate change, both in terms of their operational activities and products & services. This requires an assessment both of mitigation activities (such as a reduction in direct carbon footprint; carbon trading; allocation of capital away from carbon-intensive companies) and adaptation activities (such as weather-proofing the financial institution’s own infrastructure; reviewing how portfolios will be affected by rising sea levels, drought and so on; developing new insurance products).
- Regulation – Financial services have the potential to influence capital they supply, as a result companies are becoming increasingly regulated internationally.
Understanding the impact of sustainability on regulatory capital
Banks and insurers are required to calculate the amount of capital they need to hold in order to withstand possible (albeit unlikely) adverse events, including: credit risk, natural disasters and so on. Climate change has been recognised by the Financial Services Authority as a factor that should be considered in these calculations. An increase in the frequency of extreme losses experienced could mean more capital is required to be held, or since it is a global phenomenon, act to reduce the geographical diversification benefit gained in capital terms from operations in different parts of the world. This has the potential to be a significant factor in the overall financial performance of an organisation. This issue is discussed in the Association of British Insurers (ABI) report, the Financial Risks of Climate Change.
Are there challenges in this area we haven't discussed? If so, please tell us about them.
Do you have another example of how these challenges can be overcome? If so, please submit a case study.