How can banks make a positive impact?

Banks play a vital role in our economy, providing individuals and businesses with access to capital so they can innovate and raise living standards. But are they really responsible stewards of capital? Do they achieve the net positive impact on society and environment that we are looking for?

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Louisiana Salge, 1st April 2020

Climate change is an important theme in the EQ Positive Impact Portfolios, and one where we believe that banks can play an important role. Bank lending decisions determine the future shape of our economy. By lending less to polluting industries, and more to renewable sectors, banks can speed up the global green transition.

Sadly, the recently updated Banking on Climate Change report confirms that the world’s largest banks are continuing to finance fossil fuel exploration and production. Largely unrestricted lending is still flowing to arctic oil, tar sands and deep-sea oil and gas exploration, which carry the most environmentally damaging track record. The leading global fossil fuel lenders between 2016-2019 were JPMorgan Chase, Wells Fargo and Citi Bank. The energy policies of most large banks are inadequately aligned with climate mitigation, and have become the focus of engaged active shareholder coalitions. We believe that investing in banks that depend on fossil fuel companies now carries a financial risk, because in the future they may suffer from stranded assets under a regulatory crack down on carbon.

Beyond this sustainability analysis, we do not carry a high conviction in the investment case for large banks either. Regulations are becoming increasingly stringent, low interest rates are putting downward pressure on margins and the big names face disruption from challenger banks and fintech start-ups. So we see limited long-term growth prospects for the largest banks. And now that many banks have announced dividend cuts this year (under pressure from central banks during the Covid-19 pandemic) the attractiveness of these companies for investors chasing yield also seems significantly reduced. As of 31 March 2020, banks and financial services companies were the second worst performing sector this year.

However, if we look beyond the large banks we do see clear positive impact investment opportunities in the financial sector:

  1. We support retail banks in emerging markets that provide inclusive finance products, extending access to financial services to rural areas and previously unbanked individuals. One example is Bank Rakyat Indonesia which has the target of reaching 70% financial inclusion across Indonesia.
  2. Developed markets like the UK still suffer from significant economic inequalities, and banks can play an important role in reducing these. In the fixed income portion of our Positive Impact portfolios we prefer to invest in bonds from mutual and regional building societies, as these are owned by and accountable to their customers.
  3. Within the banking sector, innovation is increasing our investable universe. Banks are issuing more ringfenced ‘social bonds’ and ‘green bonds’, where the capital raised can only be used to finance projects that have specific positive societal outcomes. For example, Lloyds bank has issued a series of ‘sustainability bonds’ that will only finance eligible projects, including renewable energy and green housing.

Contact our impact investing team

Have a question about the EQ Positive Impact Portfolios? Please email positive@eqinvestors.co.uk, we’re always happy to hear from you.

About the author: Louisiana Salge

Louisiana joined EQ in October 2018 as an Impact Specialist after completing a masters in sustainable business at Imperial College London. Her MSc thesis was on impact reporting and her research has significantly enhanced our methodology for reporting on the Positive Impact Portfolios. She is responsible for our impact fund research, and further evolving EQ’s impact strategy.

Before studying for her masters, Louisiana graduated from UCL with a BSc in Geography and spent a year working for a Cleantech innovation research company.

Outside of her career, Louisiana loves travelling and discovering new places, cooking with friends and spending time outdoors.