For years, values-based banks have delivered positive social and environmental impacts for clients and communities. They have done so while generating a fair profit. But rather than be in business to maximise profit, their very DNA and mission statements have been developed around concepts such as equal opportunity and sustainability. In other words, for some banks, making a positive impact is simply what they do. 

But how do they do it? This was the focus of an exploratory study published in the academic journal Sustainability, Link to study. The study, by the Global Alliance for Banking on Values (GABV) and the Barcelona Pompeu Fabra University, fills a gap in current literature about best practices by financial institutions to achieve social impact and about the pioneering role that values-based banking has played in the banking industry for decades. More importantly, the findings have practical implications for all types of financial institutions willing to improve the way in which they address social challenges, and ultimately, create a more resilient and transformative financial system.

The Five Stage Model of Values-based Banking

The new study identifies a systematic approach derived from the best practices of 30 financial institutions – all members of the Global Alliance for Banking on Values and frontrunners in their industry – which shows how practitioners, including bank managers, investors and public authorities, can design and embed effective social impact practices across their entire organisation.

This five-stage ’social impact virtuous circular model’ recognises that efforts toward societal transformation should be continuous, holistic and comprehensive. Each step of the circular model clearly shows the way in which these institutions address and achieve social impact. It posits that an institution must DEFINE social impact objectives, DESIGN a comprehensive approach to achieve that impact, IMPLEMENT the design in practice, and MONITOR the result in order to evaluate the initiative’s success, ultimately allowing for the possibility of SCALING UP these efforts in the future.

1. DEFINE: POSITIVE IMPACT 

The first stage, defining social impact, is critical to an institution’s ability to set meaningful priorities. Even if there remains a lack of official consensus around what constitutes “positive impact,” the study found that for values-based financial institutions “impact is about the difference we make for society and the environment.” It further concludes that a positive contribution to impact must consist of three parts:

1. Values to inform decisions and the direction of travel;
2. Social, economic and/or environmental challenges that need addressing;
3. Resources in the hands of clients and communities enabled by banking activity, i.e. jobs, health, education, basic infrastructure, housing, food and safety. 

Key to the definition of positive impact is the centrality of values in the envisioned future. In practice, those institutions that prioritise the values of fairness and inclusion reported offering targeted access to capital for underprivileged groups. Those that also prioritised sustainability and human dignity focused on quality affordable housing, for example.

2. DESIGN: A COMPREHENSIVE APPROACH 

As important as defining positive social impact is how value-based financial institutions design their processes, products and services to ensure that they adequately reflect their priorities and provide them confidence in achieving their specific goals. The design stage ensures that values-based institutions incorporate social impact into every level of operations, from products to organisational structure and human resources tools. 

The three main impact targets considered at this stage are the economic sector, such as agriculture, energy, arts and culture, asset class – mortgages, commercial real estate, business loans – and the personal characteristics of clients, including race, gender and employment status. The emphasis on these dimensions varies among institutions, but ensuring current accounts were focused around client personal characteristics was common, while sector was the most relevant dimension for business loans and investment products.

Values-based institutions also evaluate both how the client is directly impacted and how the activities of the client indirectly impact different sectors, whether it’s around social, economic and environmental well-being. Later, these institutions will often measure their effectiveness in the number of loans, share of portfolio, number of clients or by the full set of beneficiaries of banking products and services, like the ambition to impact 250m lives by 2025. In some cases, targets are on top of those set by government authorities and central banks.

At the heart of the design stage is creating products and services that prevent locking in harm. This goes much further than considering any significant risks to the borrower, client, community, and the environment due to the borrower’s activities. Negative impact risk is addressed directly in all products and services to eliminate potential biases, and can also involve proactive activities such as resolving community issues or enabling resources. Some go even further to utilise strict exclusion lists to identify activities, products and, in some cases, transactions and practices that should not be financed because of the harm they cause, and these are characterised by the study as “comprehensive and ambitious.” 

3. IMPLEMENT: A UNIQUE MODEL

Designing social impact in the context of a large values-based financial institution is inherently complex. The implementation stage refers to how these institutions effectively facilitate the delivery of impact at every level, where having a social impact is the responsibility of all co-workers rather than one department. As the study states, “internal coherence is key.”

For one thing, social impact is not merely an “add-on” for values-based institutions. It is integral to their identity as a business and embedded into their culture and operations. Values-based financial institutions were in overwhelming agreement on the cultivation and maintenance of progressive working environments, with four-fifths openly promoting equal gender wages and “encouraging innovation” related to inclusion in the workplace. 

A number of tools have been developed to support coherent decision making, with these institutions putting impact transparency and client advisory protocols that advance their values alongside financing and investment guidelines at the start of the underwriting process. Loan committees also support the implementation of social impact by including a loan’s contribution impact in their assessment. A key point of difference that the values-based model offers is in its close communications with clients. Counsellors, for example, work closely with clients in debt and struggling financially, and partnerships with organisations in the community are also integral.

There is also a unique level of Board engagement at values-based institutions in driving positive social impact, and they play a key role in setting voluntary environmental commitments and ensuring that environmental and social regulatory requirements are met. More than two-thirds of respondents reported Board support for monitoring and tracking progress on social impact. 

4. MONITOR: CONTINUOUS FEEDBACK LOOP

The purpose of monitoring is to verify that the key stages have been integrated through oversight of the targeted points of impact. However, the level at which values-based institutions measure impact goes way beyond standard reporting.

When assessing direct impact, values-based institutions distinguish between “minimum” or “sustainable,” where direct minimum impact might mean providing financial access to underserved populations, and direct sustainable impact goes another step further to also ensure that these activities cause no significant harm to the environment. For indirect impact, these banks distinguish between “minimum” and “transformative”, where the minimum would be facilitating activities to address multiple and intersecting challenges, and transformative means financing clients to transform their business activities for sustainability and social impact and do not harm the environment.

Crucially, the integrated approach to social impact used by these banks allows them to capture changes in the number of resources financed, such as jobs, housing and education, and whether they can be linked directly to the performance of the definition, design and implementation stages. In this way, banks aim to develop a continuous feedback loop, where they learn from the process and then leverage social impact to achieve a larger market share and scale up their business.

5. SCALE UP: SOCIAL IMPACT AS STANDARD

Previous research by the GABV backs up the soundness of the values-based banking model, showing that lending to the real economy delivers better financial returns when compared with the largest banks in the world. Perhaps the biggest challenges facing these institutions, however, exist as a barrier to their ability to take their novel impact model to the next level of scaling up. 

The study outlines a number of current regulatory constraints in some regions and sectors that make it difficult for institutions to expand credit opportunities for the financially insecure. In some cases, values-based institutions simply lack the financial resources necessary to build out and launch more ambitious impact campaigns. 

The best practices gleaned from this study suggest that there is also a business opportunity to consider. Changing the way banks operate, so that responsibility for the environment and society lies at the core of their business and mission alongside financial viability, means that banks can actively do good. The blueprint to make this a reality already exists; now is the time for financial institutions, policymakers, regulators and bank clients to trigger an evolution in banking so that our financial institutions deliver social impact as standard.