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How values-based banks advance social impact objectives in the EU

GABV

24 January 2022

Much is being said about sustainability in the financial system. Announcements of future commitments by banks to deliver environmental and social goals, as well as debates about sustainable finance policies, led by the European Commission, are widespread. Meanwhile, a group of values-based banks continue to practice a form of banking that contributes to social empowerment, environmental regeneration, and economic prosperity.
Making a positive impact is simply what they do. But how do they do it? And how can this model help other institutions and regulators to advance the sustainable finance agenda?


The roadmap to a social taxonomy

The European Green Deal requires investments in sustainable activities and projects, making a common language and a clear definition of what is sustainable necessary. The Action Plan on Financing Sustainable Growth calls for a common classification system for sustainable activities, known as the EU taxonomy, which identifies six environmental objectives, including climate change adaptation and mitigation. Expert inputs to this work are provided through the Platform on Sustainable Finance, which the European Commission has tasked to further develop the EU taxonomy and to explore its expansion to social objectives.

A report by subgroup 4 of the Platform, published in July 2021, recommended a social taxonomy to help investors identify opportunities to enable inclusive and sustainable communities, affordable healthcare and housing, and decent jobs. In response to a call for stakeholders feedback on the draft report, the Global Alliance for Banking on Values (GABV) supported the proposal to integrate sustainability and social impact, but recommended embedding social impact themes in a broader approach focused on the real economy.

“The social taxonomy criteria should not translate into legally enforceable thresholds, but rather in a guidance document that can serve as a reference for financial institutions and investors to assess social impact.” – GABV


 

Read our reply to the EU Open Consultancy here

In its final report, published on 28 February 2022, the Platform confirmed that it is crucial to define clearly what constitutes a social investment.

Read our assessment of the Final Report on Social Taxonomy by the Platform on Sustainable Finance



A guide to social impact: Lessons from frontrunners

How values-based banks create social impact has been the focus of an exploratory study by researchers of the Global Alliance for Banking on Values and the UPF Barcelona School of Management, including the Chair in Sustainable Finance, published in the academic journal Sustainability.

DOWNLOAD:


THE VIRTUOUS CIRCLE MODEL OF VALUES-BASED BANKING
Social impact model
Social impact model of VBBs

Values-based banks focus their finance on the real economy (as opposed to speculative investment in the financial economy). They understand the connection between economic stability and human rights, equal opportunities, social inclusion, and access to high-quality services. And they go much further because values-based banks follow a holistic, continuous, and comprehensive approach to deliver positive social impact.

The paper’s authors have identified five stages of the Social Impact Virtuous Circular Model: an institution must DEFINE social impact objectives; DESIGN a comprehensive approach to achieving that impact; IMPLEMENT the design in practice; MONITOR the result to evaluate the initiative’s success; and ultimately allow for the possibility of SCALING UP these efforts in the future.

 

Lessons for a social taxonomy

The paper’s findings can directly help the EU to reach its goals to advance positive social impact. More specifically the study informs the EU’s sustainable finance agenda in different ways:

  • Fund managers and banks or insurers as distributors seeking to comply with the definition of “sustainable investment” in the funds’ disclosure rules (SFDR Article 2(17) applied to Article 6, 8 or 9 funds), or the revised ELTIF-rules can use this model to integrate sustainability assessments of investees in their internal processes. (See more detail about these frameworks in the footnotes).
  • Members of Parliament can draw on the GABV’s findings to determine best practices for the Social Taxonomy, use proven Key Performance Indicators to measure impact, and ensure effectively “do no significant harm” criteria. The influential Platform on Sustainable Finance has suggested as much in their Social Impact Report, saying the application of a social taxonomy could follow this model.
  • The model can serve as a basis for banks to follow the latest requirements of their internal processes, including an impact assessment over a ten-year horizon. And finally, the model informs the role of banks in a social economy, as defined by the EU’s Social Economy Action Plan.

 

Meet the authors

Adriana Kocornik-Mina
GABV Metrics and Research Sr Manager
adriana.kocornik@gabv.org

“Social impact is always a relative concept, and as such, the social taxonomy criteria should not translate into legally enforceable thresholds, but rather in a guidance document that can serve as a reference for financial institutions and investors to assess social impact.”

 

Ramon Bastida
Vice-dean for Transfer Knowledge
ramon.bastida@bsm.upf.edu

The achievement of social impact objectives depends largely on the level of integration in the organisation and its business model. Values-based banks integrate social impact objectives throughout their structure, from the board of directors to the branch network.”

 

Marcos Eguiguren
Associate Provost for Strategic Projects and Director of International Chair in Sustainable Finance
marcos.eguiguren@bsm.upf.edu 

“For values-based banks, delivering social impact is part of its most intrinsic purpose, its mission and its essence. While for mainstream banks, however, social impact is just an add-on to their usual activity and, in many cases, the answer to the need to comply with a new regulatory framework.”


How to influence on a global scale

The findings have practical implications for all types of financial institutions and policymakers to improve how they address social challenges and create a more resilient and transformative financial system.

 

Financial industry
Regulators and policymakers
Academia
Customers
Practitioners, including bank managers, investors and public authorities, need to design and embed effective social impact processes across all their systems, products and services.
Regulators and policymakers can tackle obstacles to scaling up this model such as acknowledging the low-risk profile of social impact portfolios in banking rules, by limiting the finance of harm. 
The study provides a valuable resource for researchers and challenges them to conduct a deeper investigation into the scaling-up stage and work towards a more resilient and transformative banking system.
Bank customers need to ask what their banks and fund managers do; after all, as financial institutions are intermediaries of other people’s money.

 

Funded by

This report is part of the VALoRE (Values Regulation in Europe) project, that aims to strengthen the capacity of the financial sector in Europe to deliver a just transition to a low carbon, socially inclusive future. This just transition is as much a right of every European Union citizen as a key to peaceful societies. The project has been funded by the Open Society Foundations as part of the Open Society Initiative For Europe research programme (OSIFE).

 

Participants

The study incorporates a sample of 30 banks from the GABV operating in five regions of the world, so that learnings and best practices can be applied to different socio-economic contexts. The model can help participants reflect on how their organisation delivers impact, and on how the capacity for creating positive impact can be further nurtured. The model can also help distinguish the different stages that banks are at when it comes to delivering impact.

 

 


Resources Hub

Find articles and videos from the authors and links to the main regulatory frames already mentioned here.

  1. What do you expect from the Social Taxonomy? GABV reply to the EU public consultation
  2. Banking and the recipe for positive social impact (Italian)
  3. Valorar el impacto social: medir más allá del resultado económico (Spanish)
  4. La regulación para financiar el crecimiento sostenible, menos es nada (Spanish)
  5. La finalidad social de la actividad financiera y la taxonomía de la UE (Spanish)
  6. Toxic Taxonomy (Triodos Bank)
  7. La CE considera gas y nuclear como energías verdes para contentar a Francia y Alemania (Spanish)
  8. La GABV all’Europa: «Niente scherzi sulla tassonomia sociale, sia ambiziosa» (Italian)
  9. The GABV asks the European Commission for an ambitious Social Taxonomy
  10. GABV’s assessment of the Final Social Taxonomy Report by the Platform on Sustainable Finance
  11. #NotMyTaxonomy: calling on the EU Parliament to vote for a truly sustainable taxonomy
  12. GABV: “The decision to include gas and nuclear in the EU green taxonomy undermines the credibility of the EU to combat the climate urgency”
  13. UPF Barcelona School of Management: “The European Parliament is wrong to include gas and nuclear as green energy, as they are clearly not”
 
Footnotes
List of the relevant regulatory frames, as included in the hyperlinks:
  1. Sustainable Finance Disclosure Regulation (SFDR), application of Article 2(17)
  2. European Long-Term Investment Fund (ELTIF) revision
  3. Draft report on social objectives for the EU Taxonomy
  4. European Banking Authority (EBA) – application of Article 98 CRD
  5. EU Social Economy Action Plan launch 

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