The Banking for Impact Working Group has launched to measure the direct impact of banks’ financing on society and the environment, leveraging Harvard’s Impact Weighted Accounts Initiative. The Group includes senior officials from Danske Bank, DBS, UBS, ABN AMRO, Harvard Business School, and the Impact Institute.
The intention is that by 2022 there should be a protocol by which the banks can assess their loan book and every corporate client by their impact. The basis for this will be the Weighted Accounts Initiative launched by Harvard in 2019.
Sustainable investments now total $35.3 trillion — more than one-third of all assets in five of the world’s biggest markets, according to the Global Sustainable Investment Alliance, and sustainability bonds are likely to surpass $1 trillion by the end of this year.
However, there is growing concern about potential greenwashing due to inaccurate labeling of sustainability and ESG investments, as well as wide scale recognition that ESG scores are wildly inconsistent and not comparable due to the lack of common methodologies. In fact, climate litigation cases doubled in the past six years due, in part, to concerns over inadequate corporate actions and disclosures. Additionally, despite the record-breaking growth in sustainable investments, we have not yet seen a downward trajectory in climate-related events.
Still, there is little doubt that the finance industry, and its stakeholders, will be heavily impacted by the consequences of climate change. Carbon Brief has estimated that a 1.5°C temperature rise will result in economic losses of 8% of GDP per capita by 2100. Swiss Re has estimated economic losses of $330 billion in 2017 alone.
Financial firms need new reporting rules that pull positive and negative externalities like job creation and pollution into standard practices to provide a well-rounded picture of how they create true value, the Banking for Impact consortium said in a statement.
To that end, Banking for Impact aims to create new reporting standards for financial firms known as impact measurement and valuation (IMV), fueling sustainable economic decisions. According to the Group’s vision paper, “Financial institutions should be committed to the transition to an impact economy and should strive for more accurate impact measurement and reporting because by not doing so they risk damage to reputation and credibility. Further, new theories of dynamic materiality highlight the financial risks associated with a lack of understanding of environmental and social impact. Impact measurement and reporting is a way to future-proof financial institutions.”
The Group is working on a robust, scalable and cost-effective method for the quantification, valuation, attribution and aggregation of impacts for the sector. With support from the financial industry, the goal is to scale up and standardize these efforts over time. Impact must be included as a driver of economic profit and factors like job creation, climate change, quality of life, and human rights must be considered.
Harvard Business School has published groundbreaking research on IMV since launching the Impact Weighted Accounts Initiative (IWAI) in 2019. Recent Harvard research monetizing the impacts of over 1,800 public companies’ operations revealed a significant relationship between negative environmental impacts and lower stock market valuations, underscoring the strong business case for greener business models.
Sir Ronald Cohen, Chairman of IWAI and the Global Steering Group for Impact Investment, said: ”The sooner banks embrace impact measurement, the sooner they can meet rising expectations for responsible behavior. Impact transparency will focus banks on providing solutions for people and planet, rather than financing the creation or aggravation of problems. This will redefine banking success to include both profit and impact performance, improving lives and the planet.”