Sustainable banking - the economic dimension

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The banking sector, as one of the cornerstone industries, has a significant role to play in our planet's future sustainability. Customers are saying that it's the right thing to do, suppliers are coming on board and staff members are engaged. Shareholders have also recently added their voices, understanding that the lack of a sustainability strategy poses a threat to reputational risk and, hence, shareholder value.

One of the challenges to developing a strategy for sustainable banking is meeting the consumer, supplier and shareholder demands while minimizing the impact on the world's resources. First and foremost, a bank must give customers what they want fairly, responsibly and transparently. At the same time, it must provide good working conditions for its staff and deliver profitable growth for shareholders.

Looking at the bigger picture, a bank's activities should contribute to overall economic growth and stability, with minimal negative impact on the environment or society. Sustainable banking requires an understanding of the "triple bottom line"; economic advancement alone is not enough, because environmental protection and social stability must also be taken into consideration.

The recent financial crisis showed what unsustainable banking looks like, and it was not a pretty sight. Banks accepted their share of the blame for the market turmoil and the global economic downturn that followed. They accepted there was too much irresponsible lending to businesses and individuals who could not afford to repay their debts; and they acknowledged that many banks placed too much focus on risky derivatives and structured products that few people, even the bankers who created and traded them, understood.

Sustainable banking in a customer context means many things. It means that when credit was scarce at the height of the crisis – and it still is scarce in some respects – banks must continue to lend, or even increase lending, to healthy small- and medium-sized business to keep the economy turning over. It means providing mortgages to credit-worthy borrowers to keep the housing market afloat. It means providing basic bank accounts to the less well-off to reduce financial exclusion. And it means developing innovative products and services that meet customers' needs and enhance relationships.

The importance of this economic dimension is stressed by Peter Sands, Group Chief Executive of Standard Chartered, who in the bank's Sustainability Review 2009 writes that its sustainability policy aims for three outcomes: "contributing to the real economy," "promoting sustainable finance" and "community investment" (more on the latter in my next post). Sustainable banking is, he writes, about being "here for good" – Standard Chartered's new slogan that neatly encapsulates its policy.

Examples of Standard Chartered's contribution in this respect include the fact that in 2009 it increased lending to customers by US$36 billion. That total included a $10 billion increase in mortgage lending, without compromising its risk standards – its average loan-to-value in its portfolio is 52 percent. On the financial inclusion front, it achieved its Clinton Global Initiative commitment to provide $500 million to microfinance institutions in Asia and Africa two years ahead of schedule.

Although a bank's raison d'etre is to deliver profits and value for shareholders, they need to heed the triple bottom line, where environmental and social results have to be considered as well as the financial, business and economic. Business analytics has a role to play here - by helping banks gather and analyze data about their economic impact beyond their profit-and-loss accounts and balance sheets. If a bank's sustainability policy includes a commitment to providing more microfinance for the self-employed in emerging markets, if it involves helping poorer sections of the community to gain access to bank accounts and other financial services, and if it means treating customers fairly, then that bank will need to set targets and measure its performance against those targets.

Measuring performance in the economic arena is important not only for internal purposes, but also to prove to external observers that the bank is living up to its promises and that its activities contribute to the good of the economy and are sustainable.

Take microfinance. If a Western bank makes a commitment to provide loans to microfinance institutions in developing countries so they can make microloans to the self-employed in those countries, a business analytics framework will prove invaluable. It will assess the size and nature of the market in each country, identify the appropriate microfinance institutions, monitor the loans they make (typically only about $150 per individual), keep track of repayments and bad debt levels, and monitor how collections are handled.

Accurate data, combined with business analytics software, will provide the high-quality management information and analysis that Western lending institutions need. It will profile and segment different institutions within the microfinance sector, allow them to make forecasts about future trends, and optimize their lending decisions. Finally, it will enable the Western bank to measure the overall benefit to the economy of its microfinance initiatives and the businesses created or sustained. For example, the $540 million that Standard Chartered lent to 63 microfinance institutions in 2009 translated into microloans to 3.6 million individuals.

Treating customers fairly is another tenet of the economic dimension of sustainable banking; it is becoming a regulatory requirement around the world. But first and foremost, it makes sound business sense to treat clients well and take a responsible approach to sales and marketing, because that is what builds customer relationships, revenues and profits. It would seem that customer retention is an example of an economic sustainability performance indicator.

I'll talk more about the two other aspects of sustainable banking (social and environmental) in future posts. In the meantime, read the entire white paper, Sustainable Banking.

What tips could you give bankers for improving customer, staff and shareholder focus while reducing economic impact?

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