New alliance proposes scorecard for banks to measure non-financial impact

A NEW international financial alliance has proposed new rules for banks to measure the environmental and social impact of their activities, in an effort to scale up impact management and reduce deficiencies of current approaches in assessing the sector's non-financial performance.

The Banking for Impact (BFI) consortium, which Singapore's DBS is a part of, on Wednesday published its four-step protocol, which seeks to quantify, value, attribute and aggregate to capture the full scope of impact along financial institutions' value chains.

"Our global economy remains stalled at a critical juncture where value outweighs values," the consortium wrote in its 29-page vision paper. The financial services sector, it stressed, is especially well-positioned to lead the transition towards a more inclusive market economy.

Other members of the alliance include Swiss investment bank UBS, Dutch bank ABN AMRO, Danish bank Danske Bank, the Harvard Business School and the Impact Institute.

Financial firms must first be able to quantify impacts in order to track, manage, and report on all types of impact in a consistent manner, the BFI said. While some impacts can be easily measured, like the number of jobs created or the amount of carbon dioxide emissions, others may require more work, such as well-being created from employment.

After quantification, impacts must be translated into monetary values so they can be evaluated in relative terms.

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For instance, a company may be hard-pressed to decide which is better - reducing water usage by 100,000 m3 or reducing carbon dioxide emissions by 1,000 tonnes. Converting these numbers in a single unit, such as a representation of the costs to society, will allow the company to make a better-informed decision.

Valuation also shows whether the gains outweigh the losses, as some decisions are positive for certain impacts and negative for others.

Third, there must be a clear attribution approach for determining exactly how much impact should be attributed to the financial firm. While financial institutions do create some impact directly, the majority of their impact is indirect, such as through the facilitation of client activities. That said, financial institutions are still partially responsible for this indirect impact, BFI said.

The final step in its proposed scorecard is aggregation, wherein impact information is combined and made suitable for comparison and decision-making.

BFI said its long-term vision is to have an open-source, standardised impact measurement and valuation approach and data protocol that are widely adopted and comparable across financial firms. It aims to publish a methodology for banks by this year.

The lack of universally accepted sustainability reporting standards is a conundrum highlighted by many in recent times. Market intelligence provider S&P Global had said in an article last October that while there has been an increase in ESG data and rating providers, that has only added to confusion in the market.

Currently, the two primary sources of insight into a bank's non-financial performance include self-disclosed sustainability or corporate social responsibility reports and ESG scores and ratings.

Neither approach is currently designed to assess value-creation for all stakeholders in the banking value chain, the BFI said. Furthermore, research has shown the correlation between different ESG ratings to be "demonstrably low", it said.

"We need to move toward methods and metrics which provide credible information on the effects of companies' actions and activities on their stakeholders, such as people and the planet. A methodology that is objective and quantitative provides complete and comparable impact data, and can be used to help with decision-making," the BFI said.

DBS chief executive Piyush Gupta said that financial accounting, while a useful means of measuring performance, misses out on other critical impacts that economic actors have.

"As the world increasingly begins to accept that the role of a corporation is to cater to several constituencies, not just shareholders, it becomes imperative to create a better scorecard, one that takes these 'non-financial' externalities into account," he said.

At a separate briefing by the consortium on Wednesday, sustainability experts at the various financial institutions stressed that sustainability is no longer just a matter of reputation risk, but has considerable implication for banks’ and companies’ bottom lines. 

“It’s really financial risk and real financial opportunities. So running this as a side CSR (corporate social responsibility) project will not hack it,” said Kristina Øgaard, Danske Bank’s head of sustainability strategy and governance. 

Financial institutions must take care to ensure they do not end up with stranded assets, while helping actors with a positive impact to create a “plus-sum game”, she said.

DBS’ chief sustainability officer Mikkel Larsen said impact measurement is “critically important” for Asian banks because of high poverty levels in some countries in the region.

Asked by The Business Times if this BFI’s proposal risks getting lost in the alphabet soup of sustainability protocols, Mr Larsen said the method should “stand on its own merits”. 

“What this consortium can do is to create a robust yet practical methodology that can be used and implemented without the need to have too many technical experts in the banks.  If we do that, I believe banks will be naturally interested, because they have a tool that helps them make better informed decisions. It solves a real problem for them,” he said.