Sustainable Banking Scorecard Overview 2015

Sustainable Banking Scorecard Overview 2015

Global Alliance for Banking on Values A short history Year 2009 2010 2011 2012 2013 2014 Independent network of sustainable banks founded with nine members and combined assets of nearly USD 12 billion Goal established of touching one billion lives with sustainable banking by 2020 Plans created to find new sources of capital, develop human capital, and improve metrics on non- financial results Research issued comparing financial profiles of sustainable banks with Global SystemaFcally Important Financial InsFtuFons Berlin DeclaraFon, inifafon of investment vehicle to provide new sources of capital and development of Scorecard for assessing banking sustainability focus 25 members with yearend 2013 assets of USD 77 billion and nearly USD 17 billion in funds under management - now 28 members Page 2

The Principles of Sustainable Banking Grounded in communities, serving the real economy Triple Bo*om Line central to business model All principles embedded in the bank s culture Long- term client relations, understanding their activities and risks Long- term oriented and resilient to disruptions Transparent and inclusive governance Page 3

The Business Case for Sustainable Banking Real Banking for the Real Economy: What long term value does a bank provide to stakeholders including society, clients and investors? Four questions researched using financial information through year end 2013: What support does a bank provide to the real economy? How resilient is a bank in the face of economic challenges? What returns does a bank provide to society, clients, and investors? What growth does a bank deliver to expand its impact? Page 4

GABV Research: Real Economy In October 2014 the GABV published updated research comparing Sustainability Focused Banks (SFBs) with the Global Systemically Important Financial Institutions (GSIFIs) Exposure to real economy was estimated by ratios of Loans and Deposits to Total Assets SFBs show substantially higher exposure to the Real Economy Loans / Total Assets 2013 2008 2003 SFBs 76.2% 76.0% 77.1% GSIFIs 40.5% 38.8% 43.4% Deposits/Assets 2013 2008 2003 SFBs 80.4% 71.5% 71.4% GSIFIs 48.8% 42.0% 47.3% Page 5

GABV Research: Capital Strength SFBs maintain high capital positions in terms of Equity to Total Assets GSIFIs outperform SFBs in the Tier 1 Ratio in 2013 but the ratio of RWAs to Total Assets highlights the impact of non-transparent RWA models on this capital ratio Equity / Total Assets 2013 2008 2003 SFBs 7.7% 7.3% 6.2% GSIFIs 6.6% 5.0% 5.2% Tier 1 Ratio 2013 2008 2003 SFBs 12.4% 11.6% n/m GSIFIs 13.3% 10.1% n/m RWA / Total Assets 2013 2008 2003 SFBs 60.9% 60.5% n/m GSIFIs 39.8% 41.0% n/m Page 6

GABV Research: Real Returns Financial returns for SFBs are attractive, especially considering their higher level of Equity to Total Assets: Ø Starting in the crisis year of 2008 SFBs consistently outperform GSIFIs in RoA while delivering slightly higher levels of RoE Ø SFBs show much lower levels of volatility in their returns RoA 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sustainable Banks GSIFIs 20.00% 15.00% 10.00% 5.00% RoE 0.00% -5.00% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sustainable Banks GSIFIs Page 7

GABV Research: Growth SFBs show much higher growth in key operational activities, especially in the post-crisis period when compared to GSIFIs. Total Loans From 2003 From 2009 SFBs 9.3% 13.2% GSIFIs 8.3% 3.8% Total Deposits From 2003 From 2009 SFBs 10.4% 15.3% GSIFIs 9.4% 4.9% Total Income From 2003 From 2009 SFBs 6.4% 8.5% GSIFIs 6.4% 6.5% Page 8

Why is GABV developing a Scorecard? A structured approach based on the Principles of Sustainable Banking and developed with practitioner knowledge and experience for: Self-assessment tool by banks with a sustainable banking agenda Structured reporting on sustainability to stakeholders by banking institutions Assessing of banks for GABV membership Assessing of banks for investments by Sustainable Finance Real Economy Addressing the Berlin Declaration goals Page 9

Sustainability Banking Scorecard: The Structure Basic Requirements Quantitative Factors Qualitative Elements Sustainability Score Regulated Banking Institution Sustainability Mission Transparency Financial Viability Real Economy Focus Triple Bottom Line Focus Strategic Direction Implementation Identifiable Results STOP GO Base Sustainability Score Sustainability Score Calibration Page 10

Sustainability Score Sustainability Score 100 90 80 70 60 50 40 30 20 10 0 Established : Financial institutions that already demonstrate, through their business models, internal practices and results, an authentic and thorough commitment to embedding sustainability into their banking model to meet the needs of their communities. Engaged: Financial institutions whose leadership has embraced the sustainability-focused banking model and have made concentrated efforts to steer the organization in this direction, though its products and internal practices lack full realisation. Emerging: Financial institutions whose management is convinced of the power of a sustainability focused banking model and has the sincere intention and initial actions for steering its institution towards the adoption of sustainability-focused banking products and services. Page 11

Basic Requirements STOP GO Regulated Banking Institution Statement regarding regulatory framework and status and evidence of client deposit and lending relationships Mission Statement Institution s mission statement has elements related to at least one of the Principles of Sustainable Banking Reporting Transparency Evidence of transparency of reporting to all stakeholders, especially relative to sustainability commitments Basic Requirements Quantitative Factors Qualitative Elements Page 12

Quantitative Factors: Overview A variety of Quantitative Factors are measured with a focus on using existing financial reporting information supplemented by management accounting elements. Management accounting reporting allows for more transparency and consistency. The Quantitative Factors provide insight into three elements Financial Viability, Real Economy Focus and Triple Bottom Line Focus addressed in the Principles ROA 10% Triple Bottom Line Focus 40% Real Economy Focus 25% Financial Viability 35% TBLA 40% E/A 10% D/A 10% AQR 5% RER 10% REA 15% Page 13

Quantitative Factors: Base Sustainability Score Metric Weight Minimum Benchmark 1. Return on Assets (RoA) 3 year average 10 0% Market 2. Equity to Total Assets (E/A) 10 3% 8% 3. Asset Quality Ratio (AQR) 5 0% Market 4. Client Funding to Total Assets (CFA) 10 30% 75% 6. Real Economy Assets to Total Assets (REA) 15 30% 65% 5. Real Economy Revenues to Total Revenues (RER) 10 50% 75% 7. Triple Bottom Line Assets to Total Assets (TBLA) 40 10% 55% Basic Requirements Quantitative Factors Qualitative Elements Page 14

Quantitative Factors: Real/Financial Economy Concepts A concept developed for practical decisions on how to distinguish between a Real Economy Asset and a Financial Economy Asset The core banking activity is intermediating between providers and users of capital by managing Money at Risk Exposures The allocation of Money at Risk across the Real Economy and the Financial Economy, and within those categories, to Triple Bottom Line activities, reflects priorities and focus of a bank business model, and hence its sustainability focus Classifying Real Economy Assets and Financial Economy Assets is crucial to determine the allocation of Money at Risk by a bank, and thereby to reveal its business model focus Page 15

Managing Money at Risk Exposures: A Three Dimensional View In assessing the allocation by a banking institution of its Money at Risk Exposures, there are three independent dimensions to consider: 1) On or Off Balance Sheet 2) Financial Economy or Real Economy 3) Triple Bottom Line or Non-Triple Bottom Line TBL Non-TBL Off Balance Sheet On Balance Sheet FE RE Page 16

Real/Financial Economy Guidelines Degrees of Separation Concept Financial instruments should be classified as Real Economy if they are no more than one degree from a Real Economy Asset or Activity. A specific type of financial instrument could be in different categories depending on its actual use by the banking institution. Real Asset/ Activity One degree Two degrees Three degrees Four degrees Real Economy Financial Economy Financial instruments with fewer degrees of separation from the Real Economy demonstrate Transparency and closer Client Partnerships Transparency Client Partnerships Page 17

Triple Bottom Line Activities: Categories to Consider People: social empowerment Education, health care, social inclusion, arts and culture, or special needs housing Planet: environmental regeneration Renewable energy, energy efficiency or retrofits, green-oriented housing or buildings, waste or pollution reduction, water efficiency and access, or sustainable agriculture Prosperity: economic resiliency MSME lending, micro-finance for microenterprises, or economic inclusion Money at Risk may meet more than one of these Triple Bottom Lines Page 18

Real/Financial Economy Dimension Triple Bottom Line Examples TBL To be assessed Non-TBL Real Asset One degree Two degrees Three degrees Four degrees Local medical clinic Organic farm Clothing manufacturer Loan to finance energy retrofit Loan to food manufacturer FX forward contract for clothing exporter Shares purchased in secondary market for SRI fund Liquidity deposit with other banks Loan to hedge fund for buyout Energy-efficient office building Coal energy plant Housing for seniors Alternative energy equity stake Direct financing leveraged buyout Real-estate fund with direct investments in property Hedge of client FX positions with other banks Mortgage backed securities for low income housing Specific maturity tranche of mortgage backed securities Credit default swap Tranche of a Collateralised Debt Obligation for commercial loans Real Economy Financial Economy Page 19

Qualitative Elements: Structure Scorecard 2014 QE1 QE2 QE3 QE4 QE5 QE6 Leadership Organizational Structure Products & Services Management Systems Human Resource Tools Performance Reporting Guiding Key Points Examples to be included in reporting to enhance consistency Performance Reporting Publicly available reports Internal performance tracking and reporting Page 20

Qualitative Elements: Show the Flow QE1 QE2 QE3 QE4 QE5 QE6 High Level Direction Why? Implementation and Processes Identifiable Results How? What? A holistic Flow from High Level Direction to Identifiable Results is required to provide grounding to support the banking institution s commitment to the Principles of Sustainable Banking Page 21

Qualitative Elements: Calibrating Base Sustainability Score Structure: Example: Leadership Organisational Structure Products & Services Management Systems Human Resource Tools Performance Reporting Strategic Direction Implementation Identifiable Results UPDATE FOR NEW Policy: Bank X only finances enterprises that benefit people, the environment and culture. All strategic and policy efforts, regardless of the specific discipline within the bank, reflect this focus. Implementation: New products are developed with sustainability integrated in them from new lending products to apps which connect savers with borrowers Result: Bank X to lends exclusively in sustainable sectors: Environment (x%), Social (x%) and Culture (x%) Basic Requirements Quantitative Factors Qualitative Elements Page 22

Qualitative Elements: Examples Strategic Direc+on Implementa+on Iden+fiable Results Performance Reporting Bank will be transparent in reporting on its activities All lending clients requested to allow publication of financing Detailed information on 95% of all loan clients available on bank website Products & Services Bank is committed to financing only sustainable clients All clients to be assessed using a standard tool relative to client sustainability 40% of clients have top sustainability assessment and only 10% of clients had an inadequate sustainability assessment Human Resources Tool Bank is committed to relative equality of compensation Human Resources to ensure that ratio of highest to lowest pay is relatively equal Ratio of Top 10% compensated staff to Lowest 10% was 2.3 Management Systems Bank will be compliant with the Equator Principles Credit approvals for project finance require explicit review relative to Equator Principles Loans declined for 15 projects due to lack of compliance. 10 projects restructured to comply with Equator Principles Page 23

Sustainable Finance Real Economy: SFRE or Sapphire A Luxembourg domiciled investment vehicle to support Sustainabilityfocused Financial Institutions (SFIs) Principles of Sustainable Banking used as a benchmark for investment decisions and monitoring The GABV Sustainable Banking Scorecard used as a measurement tool Investments targeted at Tier 1, Tier 2 equity and subordinated debt positions in SFIs, both GABV and non-gabv Ambition to deploy USD 1 billion in its first 10 years to support growth of the SFI segment with initial closing of USD 40 million in February 2015 Sapphire investments expected to be leverage 10 times into Real Economy lending of which 6 times expected to be focused on Triple Bottom Line lending Page 24

Advocacy/Values-based Banking Day 23 October 2014 marked a very successful first international awareness campaign of the GABV : #BankingOnValues GABV events and social media engagement: activating a % of 30,000 co-workers, plus clients, and partners Significant social media activity using the hashtag #BankingOnValues 7500+ public posts 8.8 million impressions Supported by CEO selfie photos! Media attention in 6 countries surrounding values-based banking and #BankingOnValues Creation of a suite of consistent, branded messages and collateral Activation of a new network of GABV Marketing and Communications experts Valuable insights into the importance of language localisation and how it impacts campaign adoption and engagement Page 25

Leadership Academy/MOOC Text In March to come 2015, GABV launched the first prototype of its Leadership Academy with 19 highly qualified participants, representing GABV member banks from 5 continents 18-month programme organized in 4 modules hosted by member banks and the MIT Targeted at professionals with three to five years experience at executive, mid-management and project management levels Gather the next generation of leaders from member banks (and from other like-minded organizations) to: learn together from experts and senior executives about leadership, innovation techniques and trends in values-based banking share their knowledge and experiences expand their network The GABV also collaborates with Co-Lab at MIT to develop a free MOOC on values-based banking Page 26

Global Alliance for Banking on Values www.gabv.org David Korslund david.korslund@gabv.org Page 27