giovedì, Aprile 18, 2024
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The Principle for Responsible Banking

On 22 September 2019, the UNEP FI Principles for Responsible Banking have been launched at the United Nations Headquarters in New York during the UN General Assembly. The signatories banks will be committed to align their business with the goals of the Principle for Responsible Banking, the Sustainable Development Goals (SDGs) and the Paris Agreement by bringing environmental and other social factors into investments, lending decisions and products development strategies.

First, this article outlines the rise of a sustainable dimension in finance by exposing empirical evidences on the positive impacts of the financial sector on natural catastrophes and climate change crisis. Secondly, the article provides an overview on the most recent initiatives in the Italian financial market remarking the attention of investors and corporates on the social and green factors that drive their investments. Finally, this article exposes the main purposes of the Principles for Responsible Banking and emphasizes the importance for Italian banks to implement the legal framework of the Principles for Responsible Banking together with the strategy for digital transformation.

  1. The rise of the sustainable finance

Finance industry is known as the arm of speculators and the nexus of economic and social inequalities. The failures of the financial and banking systems have been clearly exposed during 2008 when financial markets and banks were associated to speculation, opacity, corruption and huge financial losses. The loss of confidence for the financial and banking systems has mostly hit the young generations which have grown up with the idea that finance may only generates losses for the most and wealth for the few.

Today, financial and banking sectors have been re-shaped and public regulators have committed to prevent financial collapses, strengthen confidence of investors and citizens and promote financial education. Indeed, national and international authorities have been reformed or set up (such as the ESAs system in the EU) to recover trust of the society in the financial sector, boost efficiency and transparency of financial markets and support harmonization of the banking supervision mechanisms (e.g. the Single Supervisory Mechanism in the European Union).

That said, on the one hand, manipulations, inequalities and opacity in finance and banking still shake the society and broaden the distance between the financial industry and the society, on the other hand the public opinion seems not to be fully aware of the positive impacts of the financial and banking industries for social, natural catastrophes and climate change crisis.

Speculation, financial scandals and opacity have brought the financial and banking sectors closer to private interest than ever. Despite the loss of confidence in the financial system, we assist today to the rise of a sustainable dimension of finance and banking pursuing the collective interest through social and green investments and supporting a transition for a circular economy and a sustainable future.

  1. Fighting pandemics and climate change with finance: empirical evidences from the world

Pandemics, famines and natural catastrophes are increasing in frequency due to the escalation of conflicts and the environmental crisis causing political instability, massacres, massive migrations of people and social inequalities throughout the world.

To face such emergencies, non-profit organisation, political institutions and international community encounter difficulties to collect economical resources, whilst donors or money rising projects usually reach their targets too late and too inefficiently.

In this scenario, finance has been utilised to insure environment protection and prevent humanity’s catastrophes.

When Ebola virus hit Africa in 2014, the World Bank, to mitigate the probability of another pandemic in the near future, issued – for the first time – $425m in pandemic bonds to support its Pandemic Emergency Financing Facility programme. The resources and facilities collected through the bonds were intended to cover 77 of the world’s poorest countries against the threat of six different viruses likely to cause other deadly diseases[1]. As provided by the terms and conditions of the pandemic bonds, investors will renounce to their principal (the repayment of the capital invested) when a virus reaches a predetermined contagion.

Certainly, insurance companies are familiar with the “catastrophe bonds”. Such bonds, developed since the 1990s, provide coverage against hurricanes, tornados, earthquakes and other natural disasters that nowadays are likely to be related to the climate change crisis. Catastrophe bonds, $29bn market as at 2017[2], are structured to defer or cancel the repayment of the principal to investors if specific trigger conditions related to the natural disasters protected by the bonds are met.

In Japan, the first promoter for green-investments is the Government Pension Investment Fund (GPIF) which in 2015 signed the UN’s Principles for Responsible Investment. The strategy of GPIF is to focus on a long-term return strategy and to increase its investments in environmental and social projects up to 10% of its total assets[3].

What do pandemic and catastrophe bonds have in common? Surely, both the bonds provide to their investors an interest return higher than the most fixed income securities. Investigating further, such bonds are structured to cover the costs of humanitarian disasters by transferring the risk and the costs for natural catastrophes, pandemics, famines and other social issues related to climate change to the financial markets and, finally, to the investors.

Interestingly, the investors accused to speculate, to shift and erode financial resources are charged today with social costs and responsibilities for climate change crisis and economic inequalities.

  1. Recent initiatives for sustainable finance in Italy

Environmental and social investments are becoming widely supported in global financial markets through various initiatives of international organizations and stock exchanges throughout the world.

In a report published on 13 September 2019, the OECD announced that industrialised countries have provided and mobilised financial resources for climate actions in developing countries for an amount equal to USD 71.2 billion in 2017, an upwards trend with respect to the earlies years[4].

The economical and political initiatives to promote green and social investments in financial markets are becoming more common in Italy.

On 2 July 2019, the Italian Stock Exchange has launched the “Italy Sustainability Day 2019”, an event to raise the attention of companies and investors on climate change and on the transition to a sustainable finance[5].

The increasing volume of social and green securities listed in special segments of the financial markets for sustainable investments (such as the green and social segment of ExtraMOT PRO in the Italian Stock Exchange) reflects the growing attention of investors for environmental, social and governance (ESG) factors in the investment strategies.

Over 80 securities for the development of green and social projects are listed in the Italian Stock Exchange as at 5 July 2019[6]. This demonstrates that the strategies of corporates and institutional investors are more oriented than the past on sustainable investments and on stock exchanges which diversify their offer with dedicated segments for green and social securities.

  1. The Principles for Responsible Banking

A significant role for the development of the new social and green trend in finance is played by the international organizations which encourage and promote best practices, researches and data for global banks and financial institutions to help green their operations.

In 2018 UNEP FI (the Finance Initiative of the United Nations Environmental Programme) launched the consultation for the “Principles for Responsible Banking” and the “Implementation Guidance”, a valuable legal initiative to help developing a single framework for the transition to social and green business models of banks[7].

The principles have been developed by 28 banks, jointly representing more than USD 17 trillion in assets, in close cooperation with UNEP-FI and members of civil society organizations and represent the starting point for banks to align their strategies with the goals of the SDGs and the Paris Agreement.

On 22 September 2019, a total of 130 banks, representing $47 trillion in assets, from 49 countries became Founding Signatories of the Principles for Responsible Banking. Only two of the 130 founding signatories banks are Italian (i.e. Banca Monte dei Paschi di Siena and Intesa Sanpaolo)[8].

By singing the “Signature Document” of the Principles for Responsible Banking, banks are called, according to the Guidance Document, to commit for achieving the principles’ goals and monitor the effective adoption of the principles engaging in transparency on the progress of implementation of the principles[9].

The Principles for Responsible Banking are considered as an opportunity of the changing economy and society of the 21st century by creating value for both society and shareholder[10] and constitute the occasion for banks to connect financial goals with societal and environmental benefits by offering new products, services and contractual incentives related to social and sustainable projects.

Becoming a signatory of the Principles for Responsible Banking goes far beyond a static marketing campaign, but means publicly committing in self-assessment and transparency procedures and embarking in a dialogue with stakeholders, society, international competitors and UNEP FI by reporting periodically on the implementation progresses of the principles[11].

  1. The impact of the Principles for Responsible Banking in Italy

On the one hand, concrete initiatives and encouraging results have been achieved in the Italian financial sector as demonstrated by the initiatives of the Italian stock exchange. On the other hand, the Italian banking sector seems slower to react to the international movement for the sustainability of banking practices launched by the Principles for Responsible Banking.

According to an investigation of ABI Lab[12], Italian banks seem more focused in the implementation of digital innovations to offer remote on-boarding processes for customers, online lending solutions and digital payment services.

Supporting the transition to a sustainable banking is not intended as a renounce to the digital transformation in the banking sector. Indeed, the realization of sustainable business strategies rely on a robust use of technologies and on the development of new products and services in the banking sector to promote awareness of clients on social inequalities and environmental crisis.

Diversifying the banking services and products and re-shaping contractual relations with clients through contractual conditions and incentives related to sustainable projects are some of the key points to implement the Principles for Responsible Banking[13]. Indeed, the adoption of digital innovations in banking should not been considered as alternative to the realization of a sustainable strategy, but rather represents one of the keys for implementing the Principles for Responsible Banking.

Shareholders and managers of Italian banks should commit, as their global competitors, to support social and green banking models developing new digital and sustainability-related products and services to launch a change of their organizational structure and contractual relations with green and social impacts. The realization of a long term strategy for the joint enactment of digital and sustainable transformation in banking may represent the opportunity for Italian banks to challenge the digital disruption of banking services and operations of the shadow banking.

A more active participation of Italian banks to the ambitious project of the Principles for Responsible Banking would constitute a valuable opportunity to invest in the reorganization of the business models embracing both digital transformation and sustainability of banking services and operations to recover the confidence of the society in the financial and banking systems and share with the international community the responsibility for fighting the climate change and social crises.

[1] The Economist, Fighting disease with finance, July 29th – August 4th 2017, page 58;

[2] The Economist, Fighting disease with finance, July 29th – August 4th 2017, page 58;

[3] The Economist, Environmental, social and…what? – Sustainable investing in Japan, November 25th – December 1st 2017, page 68. According to The Economist, as at 2017, the Japan’s sustainable-investment balance was $474m, about 3-4% of the country’s total managed assets;

[4] OECD (2019), Climate Finance Provided and Mobilised by Developed Countries in 2013-2017, OECD Publishing, Paris, https://doi.org/10.1787/39faf4a7-en;

[5]Economia sostenibile e cambiamento climatico al centro della terza edizione dell’Italian Sustainability Day, Press release dated 2 July 2019, www.borsaitaliana.it;

[6]Borsa Italiana dà il benvenuto alla nuova obbligazione di Hera S.p.A. sul segmento green & social di ExtraMOT PRO, Press release dated 5 July 2019, www.borsaitaliana.it;

[7] The Principle for Responsible Banking, shaping our future, UNEP Finance Initiative, November 2018, www.unepfi.org;

[8] A complete list of Founding Signatories to the Principles for Responsible Banking is available on https://www.unepfi.org/signatory-statements/;

[9] On 23 September 2019, the Guidance Document has been published. Such document contains the Principles for Responsible Banking, supports banks in their implementation of the Principles and points to relevant resources, tools, frameworks and good practices. Source: https://www.unepfi.org/banking/bankingprinciples/;

[10] The Principle for Responsible Banking, shaping our future, UNEP Finance Initiative, November 2018, www.unepfi.org;

[11] Signatories of the Principles for Responsible Banking are required to report on their implementation of the Principles the first time within latest 18 months after signing and annually thereafter (in line with their annual reporting cycle) in line with the Reporting and Self-Assessment Template available on www.unepfi.org/banking/bankingprinciples;

[12] Banche: l’acquisizione dei clienti diventa digitale, ABI, 7 September 2019, www.abi.it. For example, according to the investigation of ABI Lab, among the Italian banks, 56% of them offers a digital on-boarding process for customers, 17% foresees to offer such service within the end of the year and 22% of them will carry out the digital on-boarding process within the next three years;

[13] Please refer to principle 3 (Clients&Customers) of the Guidance Document of the Principle for Responsible Banking.

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