Social consciousness is one of the most significant emerging trends of our time. As individuals begin to make a concerted effort to align their actions and purchases with the principles of sustainability and social responsibility, companies of all kinds are themselves having to respond.
As well as contributing to the demand for sustainable food, clothing and other physical goods, this trend is driving growth in demand for sustainable and socially responsible financial services, which is having repercussions in two broad areas: investors/asset management and banking.
Investors, particularly younger investors, want to ensure that their money does not just grow, but also boosts companies committed to goals such as diversity and environmental improvement, or that give back to communities by creating long-term jobs, or building schools to help educate future generations.
Globally, the percentage of both retail and institutional investors that apply environmental, social and governance (ESG) principles to at least a quarter of their portfolios jumped from 48% in 2017 to 75% in 2019. Significantly, investors in their 20s and 30s are almost twice as likely to put their money into companies or funds that target positive environmental or social outcomes.
This shift creates several challenges for financial organizations. One is to understand client requirements and provide suitable products. A basic difficulty here is that there are no universally accepted definitions of terms such as ‘sustainable investing’, ‘ethical investing’, ‘green finance’ and so on.
The more studies we have, the better the SRI criteria appear in terms of reduction of risk for the same return.
This problem will be solved partly by the growing maturity of the overall marketplace, but also by regulation. For example, new amendments to the Markets in Financial Instruments Directive II – expected to be introduced in 2021 – will mean advisers, as part of their know your customer requirements, will need to take an active role in discussing ESG preferences with clients.
Changes in discretionary portfolio managers’ product suitability questions will include how important sustainability is in clients’ investment decisions. These discussions will clarify client needs and are also likely to boost demand for ‘sustainable’ financial products.
Another challenge is to provide investment products that meet these new client requirements while delivering acceptable levels of return. And here those institutions that are well-advanced in sustainability have surprising evidence. CaixaBank, whose recently announced takeover of rival Bankia will make it Spain’s largest bank, is an interesting exemplar: sustainable investment is a core element of CaixaBank's Socially Responsible Banking Model and it is driving both increased customer engagement and volumes.
In 2019, there was a 591% increase in the average balances of the bank’s private banking customers held in socially responsible investment funds. And these clients are not having to sacrifice performance: average returns on assets are rising at both VidaCaixa and CaixaBank AM (CaixaBank’s subsidiaries for life insurance and asset management), which demonstrates that it is possible to balance profitability with responsible investment.
For example, CaixaBank AM currently manages 85.3% of assets based on ESG criteria and 100% of the VidaCaixa portfolio is subject to ESG analysis – and the average returns of CaixaBank's pension plans, via VidaCaixa, have historically exceeded the average in Spain over one, three, five and 10 years.
As, Guillermo Hermida, ESG strategy director, CaixaBank Private Banking, says: “Up to very recently the discussion was whether you have to give up returns in exchange for investing with those SRI criteria. However, the more studies we have, the better the SRI criteria appear in terms of reduction of risk for the same return.”
The banking challenge
The biggest challenge of all may come in broader banking, not investment management. Customer demands for more sustainable partners across their financial portfolios mean they are also considering more closely the overall posture of their banks. Corporate clients are increasingly looking to work with banks that can publicly demonstrate a commitment to sustainability, because their own employees, customers, suppliers and investors are demanding that they examine all their relationships. And retail customers’ motivations mirror those in the investor universe.
These demands are a significant challenge for traditional banking. A report by Boston Common Asset Management released in November 2019, covering 58 of the world’s largest banks, concluded that while a great majority of the banks (69%) had endorsed the guidelines of the Taskforce on Climate-related Financial Disclosures, few have translated them into practice.
For example, just 50% of banks engage high-carbon clients on transition strategies, a figure that can still be greatly improved. CaixaBank and its asset management arm actively engage all clients as part of their environmental strategy, which aims to help facilitate the transition to a just and low-carbon economy, while supporting sustainable economic development and growth in society.
For example, during the first half of 2020, CaixaBank continued to finance environmentally sustainable activities, including the financing of 12 renewable energy projects for €908 million, and the signing of the first sustainable factoring agreement in Spain. The operation stands out, as it includes sustainability criteria in the pricing policy of this short-term financing method.
The regulators are also taking a much greater interest in these issues. In the EU, a new sustainable finance taxonomy aimed at channelling investments into low-carbon technologies is due to come into force in 2021, although companies’ inability or unwillingness to provide information to asset managers may create delays in its implementation.
Addressing just this ecological aspect is a profound and difficult task. But it is not only green issues that exercise customers: increasingly, they want to bank with institutions with a much broader set of social, ethical and ecological principles. These include social inclusion, financial support for marginalized individuals, communities and businesses, charitable work and philanthropy, and social integration in its broadest sense.
Not everyone is a beginner
These trends play into the hands of banks already well down this path, and in particular the handful of banks, co-operatives and mutual societies founded on these principles. So again, one of these is CaixaBank, founded more than a century ago on the basis that its profitability is to be fully aligned with the returns to society. To banks like this, sustainable development and socially inclusive operations are part of their DNA.
In the case of CaixaBank, the commitment takes many forms. The bank has become a regular participant in the placement of green and social bonds and it was the first Spanish bank to issue a social bond to support the Sustainable Development Goals (SDGs) of the United Nations. Its insurance and investment arms have a wide range of products managed under sustainability and social criteria and provide a number of specific funds dedicated to core ESG objectives, and its MicroBank subsidiary is a significant (and rare) lender to the smallest and most vulnerable businesses, as well as individuals and families. The bank’s largest shareholder is also the "la Caixa" Foundation, whose 2020 budget of €560 million is directed to a multitude of projects across areas such as child poverty, social housing and employment initiatives, and which has funded a raft of services targeted at those affected by the Covid-19 crisis.
Only this combination of socially integrated banking, specific sustainable lending and capital markets activity, and asset management products that respond to the different niches of customer demand under the ‘sustainable’ umbrella, is likely to deliver the partnership that a new generation of banking clients demands.