Private Banks — Your Actions Can Make or Break Environmental Treaties
Private banks are often overlooked as key contributors to environmental targets. Yet, the demand for banks to step up their game in meeting international environmental agreements is louder than ever before. A fresh report by the Center for Sustainable Finance & Private Wealth aligns the activities of private banks within the scope of environmental treaties and proposes steps that banks can take to be serious players in environmental sustainability.
Reaching international environmental goals needs financing, and private banks have their hand on a significant lever guiding where finances flow globally. Despite this clear connection, bridging private banking activities with environmental impacts is challenged both by the internal processes of the sector as well as external regulation on national and international levels. The Aligning Misalignment report, written by the Center for Sustainable Finance and Private Wealth (CSP) and commissioned by the Swiss Federal Office for the Environment, offers an overview of what it would mean for private banks to align themselves with international environmental goals. In other words, walking the talk of the Sustainable Development Goals, Paris Climate Agreement, science-based targets, and national environmental regulations
The report, consolidating expertise from three departments of the Swiss Government and over 20 interviews with industry specialists, finds that reaching alignment with environmental goals will demand a re-defining of processes and targets across private banks. If alignment is to materialize, environmental criteria need to be integrated across key business practices and transparent, science-based impact targets set to guide these activities.
“The list of factors influencing the expectations and pressure on private banks is real and growing. For example, regulation in the EU is raising the bar for sustainable finance activities, client demand is increasing, and the current reality surrounding private banks is calling for action. Despite the pull-factors, guidance on how private banks can integrate environmental sustainability with their specific business is lacking,” Erin Duddy, lead CSP researcher explains.
The report finds the following three factors key in paving the way for the alignment of private banking activities with international environmental goals:
- Tools and practices: Updated decision-making processes, such as investment decisions, that include additional risk considerations, such as material environmental risk and risk of impact on the environment;
- Scientific targets: Development of transparent science-based target-setting methodologies for all environmental objectives, including those beyond climate change mitigation;
- Core business alignment: Based on a materiality analysis, alignment of core business and the relevant processes, targets, and measurements to ensure the bank contributes to environmental objectives.
“There’s a lot of pressure on banks to be sustainable and this calls for more knowledge on what hinders banks in meeting these expectations. Pointing the finger is always easy, but untangling hurdles with the needed speed calls for coordinated and well-informed efforts,” Duddy elaborates.
A challenge highlighted in the report is that fiduciary duty, or the duty of the a party involved in managing a client’s assets, such as a private bank, to act in the interest of the client, has varied interpretations in different legal jurisdictions. The traditional understanding of fiduciary duty is a legal obligation to maximize returns. However, there are countries where fiduciary duty goes further to include considerations on the material environmental risk to an investment. For example, under current law in Switzerland, material climate risks have to be taken into account to a large extent. Nevertheless, few jurisdictions require the consideration of potential negative impacts on the environment when making an investment decision. According to the report, this is a vital consideration if alignment with sustainability targets are a priority for private banks.
In order to provide a tool enabling accelerated alignment, the report outlines an aspirational evaluation methodology, covering topics like client engagement, industry initiatives, and the management of the banks offering of products and services. The methodology enables private banks to develop a pathway for the bank to generate positive impacts in the real economy, including supporting the work done to meet the Sustainable Development Goals.
“Sustainability is a cross-sectorial issue with real-world implications. This is why we need to identify the pieces of the puzzle that currently block us from reaching sustainability goals. This report is one piece of that puzzle,” Duddy concludes.
For more information, have a look at our website: www.csp.uzh.ch.
