The banking and financial services sector has traditionally divided its sustainability efforts into two tracks:  creating efficient environmental, social and governance policies throughout the bank’s operational locations and supply chain, and developing products and services that serve the burgeoning market demand for more sustainable options. But few institutions have integrated these tracks; internal value drivers and external customer strategies exist in parallel rather than synchrony.

Banks have a unique opportunity to go beyond traditional measures (like reputational capital preservation or enterprise risk management) and “embrace transformative change,” according to a 2014 report by the World Wildlife Fund (WWF). “Environmental, Social and Governance  Integration for Banks: A Guide to Starting Implementation” demonstrates, step by step, how capital lenders, advisors, analysts and agents can adopt more sustainable practices in multiple ways.

Other voices are urging a similar change in philosophy and practice. As Harvard professors Bob Eccles and George Serafeim wrote in a 2013 Harvard Business Review blog post, financial institutions cannot “tout their commitment to sustainability by focusing on energy and water in their sustainability reporting.” Such disclosures, however laudable, are simply not material. They should instead focus on social and governance issues, according to Eccles and Serafeim, and the broader needs of stakeholders and societies. That’s what will create jobs and drive lasting economic growth.

Not Just Banks
Other corners of the financial services market must adapt as well.  Market regulators, analysts and investors believe that environmental and social performance metrics should be part of investment protocols, corporate policy, product creation, market messaging and so on. They argue that such metrics are as valuable as traditional financial data, and perhaps even more predictive of long-term returns.

But the WWF report puts a finer point on things: “[Environmental, social and governance integration] challenges have particular relevance to banks in relation to their role as financial intermediaries and as capital raising agents. Banks are significant catalysts in promoting economic development. This role needs to include the promotion of sustainable business practices, failing which, banks will end up facilitating practices which have significant negative environmental and social impacts and will miss opportunities to create new products and services that capitalize on ESG issues.”

These new products and services have become both lucrative and global. “Consider products like green credit cards,” write Eccles and Serafeim, “which encourage customers to buy environmentally-friendly products … green securitization products (such as climate bonds), and energy efficient mortgages.”

Sometimes, the expectations of internal and external stakeholders are at odds. Customers may want these new products, and sustainability advocates may believe they are essential, but many banks and financial institutions are focusing their attention elsewhere. According to the Global Reporting Initiative (GRI), the self-reported business concerns (from 134 businesses) that are most material and relevant to the financial services sector include: customer privacy, marketing communications, equal pay and diversity.

Committing to Key Principles
These issues may have more urgency today, due to changes in climate and commerce, but they are not new. In 2003, over 100 civil society groups created the Collevecchio Declaration, a sweeping statement on the proper role of the financial sector and the responsibility it bears to promote sustainable development. The first few lines of the declaration boldly announce its primary theme: “Financial institutions (FIs) such as banks and asset managers can and must play a positive role in advancing environmental and social sustainability. This declaration calls on FIs to embrace six main principles which reflect civil society’s expectations of the role and responsibilities of the financial services sector in fostering sustainability.”

The six principles outlined in this declaration, made public more than a decade ago, are oddly prescient:

  1. Sustainability: Elevate social and environmental concerns over profit maximization.
  2. Do no harm: Mitigate negative environmental and social impacts of your operation.
  3. Responsibility: Take responsibility for your actions (and your risks).
  4. Accountability: Give your stakeholders an authentic voice in financial decisions.
  5. Transparency: Disclose material information to your stakeholders.
  6. Markets and governance: Support smarter public policies, regulations and real cost accounting.

These are ideas that we often hear repeated from nongovernmental organizations, engaged investors and even a growing number of industry regulators. Banks and financial institutions are not required to adopt a principles-based approach, but these themes are becoming more prevalent and unavoidable. For an industry that is occasionally viewed as arcane or archaic, a little aspiration might go a long way.

Evan Harvey