You often hear banks ask each other where they are on their sustainability “journey”.  The word “journey” brings with it the connotation of something that may take a while, something that will require a lot of effort, and hopefully end in an exciting or exotic destination.  Some have well-developed methodologies and plans, while others are still relatively novices in the area.

The word also captures the progress surrounding the standards and regulations that are being developed. Normally with regulations, we see them adopted as a result of an event or crisis that has occurred: Basel III as a result of the 2008 financial crisis, AML/CFT regulations in response to Riggs Bank or the events of the 9/11 attacks. The Financial Action Task Force itself was formed in 1989 primarily as a result of concerns around money laundering connected with illicit narcotics trafficking in the 1980s.  The modern financial system in the United States was largely established in the 1930s as a result of the Great Depression.

The evolution of sustainability standards and regulations is therefore interesting to observe, particularly as the trajectory has not been traditional. Some may say climate change is a crisis, but as it’s been an ongoing process: it’s hard to identify a single date or event as a turning point. Getting consensus around whether it is a crisis can also be a challenge depending on geography, politics, and many other factors.  Yet, the industry has gelled and come to a consensus that it will make changes to address the issue. 

Progress has been internally driven

Yes, governments, standard setters, and world leaders encourage addressing the issue, but the tangible outcome has still mostly been industry-driven and not prescribed by regulation in response to a crisis. The International Sustainability Standards Board (ISSB) has given us a “common language” from an accounting standpoint, but the development of standards or regulations is really coming from the industry itself.  

The banks themselves agreed to align their portfolios with the Paris Climate Agreement to support an ambitious transition to achieve net-zero greenhouse gas emissions by 2050, with interim targets as soon as 2030.  Many have gone further and embraced the broader set of 17 sustainable development goals outlined by the UN. Those goals also incorporate environmental, social, and governance (ESG) objectives and incorporate factors such as ending poverty and hunger, reducing inequalities across countries and genders, building resilient infrastructure and sustainable cities, and promoting peace, justice, and strong institutions.

While this sets the goal or the “destination” of our journey, how we get there is still a work in progress.  Many are taking quite diverse routes on their voyage. For transaction banking, it gets even more complex.  Transactions often have a heavy reliance on global networks and supply chains, and fragmented participants are often needed to facilitate transactions.  The nature of transaction banking means that additional consideration and thought need to go into the application of sustainability and net zero principles.  Many of the non-climate-related sustainable development goals are highly dependent on transaction banking, raising the question as to whether clean and affordable energy is more important than ending poverty or hunger. Sustainability priorities vary from one part to another, yet our banks are put in the position of reconciling the differences.

Not-for-profits accelerate and smoothen this process. Recently, for instance, BAFT published their Transaction Banking Sustainable Finance Product and Reporting Matrix designed to provide guidance on transaction banking sustainable finance products being offered today. The matrix summarises the types of principles, considerations and reporting that are applied when implementing a sustainable finance product while allowing a bank to chart its own course.

—

If the last few months, years, and decades have taught us anything on the route to sustainability, it’s the multi-organisation collaboration that goes into inchoate progress. Whitepaper research on ESG can translate to sustainability standards; questionnaires can inform future leadership decisions. The journey towards sustainability will be tumultuous and unpredictable, but certainly not insurmountable.