Principles for Responsible Banking

Principles for Responsible Banking
Principles for Responsible Banking
Source: United Nations Environment Programme Finance Initiative
Sector: Banking
Prerequisites: none
Classification International information exchange & Individual institutional level
Potential Impact: Moderate
Resource Impact: Minimal at governmental level (awareness raising campaign among banking community);
Moderate at individual banks’ level (mainly related to reporting requirements)
Timing Implications: Impact would take effect within several years and several reporting cycles
Country/Region Global (200 signatory bankscollectively holding more than USD 53 trillion in assets, or 40 per cent of the global banking sector)
Application to Armenia The Principles break new ground and incentivizing Armenian banks to sign on to them would ensure the Armenian banking sector joins leaders in the global industry, and stays up to date on cutting edge instruments and practices. By working collaboratively with leading peers, Armenian banks would access a plethora of tools aimed at allowing them to successfully implement the six Principles – guidance documents on impact analysis, best practice, case studies and learning from peer signatory banks, a communications toolkit, etc. 

 

The Principles for Responsible Banking are a unique framework for ensuring that signatory banks’ strategy and practice align with the Sustainable Development Goals and the Paris Climate Agreement. The Principles provide the framework for a sustainable banking system, and help the industry to demonstrate how it makes a positive contribution to society. They embed sustainability at the strategic, portfolio and transactional levels, and across all business areas.

These principles form a comprehensive framework to address the strategic, portfolio and transaction level across all of the bank’s business areas. They set targets in the areas of most significant positive and negative impact and ensure transparency and accountability through public reporting and review. The framework also offers the signatory banks guidance, expert advice and peer learning to support implementation.

UNEP FI offers signatory banks 11 Working Groups across six priority areas, and individual feedback and support. This consists of a yearly portfolio impact analysis of the bank and tailored and actionable recommendations on steps to further progress their implementation of the Principles.

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Along with the UNEP FI frameworks for sustainable insurance and responsible investment, the Principles for Responsible Banking establish the norms for sustainable finance, providing the basis for standard-setting and helping to ensure private finance fulfils its potential role in contributing to achieving the 2030 Agenda for Sustainable Development and Paris Agreement on Climate Change agreed by governments around the world in 2015. UNEP FI also supports the Sustainable Stock Exchanges Initiative (SSEI), launched in 2012 with UNCTAD, UN Global Compact, and the PRI. Today this involves 90 stock exchanges accounting for almost all publicly-listed capital markets.

UNEP FI Principles for Responsible Banking

Number Principle Description
#1 Alignment Align business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks
#2 Impact and Target Setting Continuously increase positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from activities, products and services. To this end, set and publish targets towards most significant impacts.
#3 Clients and Customers Work responsibly with our clients and our customers to encourage sustainable practices and enable economic activities that create shared prosperity for current and future generations.
#4 Stakeholders proactively and responsibly consult, engage and partner with relevant stakeholders to achieve society’s goals.
#5 Governance and Culture implement these Principles through effective governance and a culture of responsible banking
#6 Transparency and Accountability periodically review individual and collective implementation of these Principles and be transparent about and accountable for positive and negative impacts and contribution to society’s goals.

One area of major impact has been the signatory banks’ analysis of their investments from an environmental perspective. They have undertaken full reviews of emissions across their portfolio as a first step towards setting science-based targets for their entire carbon footprint. Banks have also explored novel ways to make green investments such as new partnerships of commercial, non-profit and governmental organizations that use finance in innovative ways to achieve better outcomes for the planet.

Signatory banks have been the driving change through developing new products that prioritize lending to green industries, encouraging behavior change amongst customers, for example by facilitating purchase of solar panels and electric cars. They have made credit available to support industries to make the necessary transitions, such as to reduce water pollution and improve harmful emissions reduction.

With respect to climate change, signatory banks have introduced pricing environmental risk into their expected returns, which encourages the financing of solutions with the most positive climate or environmental impact. Some banks have tightened their policies around fossil fuel lending, for example by no longer providing project finance to thermal coal mining or for new coal-fired power generation capacity. Some have moved away from providing general purpose financing to companies where greater than 25% of revenues are thermal coal related.

A number of member banks have implemented favorable borrowing terms to encourage customers and clients to adopt socially and environmentally focused products. Other new loans have been designed to encourage the purchase of electric or hybrid vehicles and solar panels.

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Examples of best practice include a European bank that developed a line of social dividends worth around $8.8 million to support water system cleansing and the local green transition. Another signatory bank introduced a program of green credits in the transport and agricultural sectors, worth $26.8 million in 2019. Other member banks have

  • launched their country’s first green mortgage;
  • created saving products aimed at preventing water and air pollution;
  • developed financial products to facilitate a government-led plan for national energy transition through the purchase of solar water heaters;
  • created a dedicated corporate sustainability advisory service to help both new companies supporting the low carbon economy and established businesses looking to become more sustainable;
  • certified green credit lines to facilitate sanitation works in their local river system contributing to the removal of industrial waste, including arsenic, copper, zinc and lead;
  • provided lower interest rate loans for investment in hybrid and electric cars; or
  • developed one of the first Certified Green Loan operations in their region.

To become a signatory, banks must sign the Principles for Responsible Banking and become a UNEP Finance Initiative member. Every year, signatories’ progress is reviewed. Within four years of becoming a signatory, each bank must have met all requirements set out in the key steps to implementing the Principles for Responsible Banking. Signatory banks commit to taking three key steps which enable them to continuously improve their impact and contribution to society:

  • Analyze their current impact on people and planet;
  • Based on this analysis, set targets where they have the most significant impact, and implement them; and
  • Publicly report on progress.

Eighteen months after signing, signatory banks must report on:

  • their impact,
  • how they are implementing the Principles,
  • the targets they have set,
  • the progress they have made.