The Win-Win of Sustainable BankingNovember 14, 2017
By Mark Gibson
For all the talk about sustainability these days, it’s a concept that continues to be frequently maligned or misunderstood. What exactly is it? Why does it matter? And how can you turn it into a differentiator and profit generator?
Baseline assumption: money talks louder than good intentions.
OK, I have to admit, until six months ago, I rolled my eyes when I heard the term sustainability in the context of business. Sure, I get the point of “green construction” and recycling. But banking has a specific role to play in the economy. Your responsibility is to keep the money moving. Layering on a do-gooder ethos—and working to make the world a better place—is only a distraction from maximizing shareholder value. Isn’t it?
Apparently not. Academic literature and research now abounds indicating that companies dedicated to sustainability outperform their rivals.
And so do their share prices.
I know what you’re thinking. I didn’t believe any of this either, until I stumbled into the world of sustainable and responsible investing (SRI), one of the fastest growing and top performing areas of the market. I learned that sustainability wasn’t solely the realm of chai-quaffing Ben & Jerry’s or Patagonia executives. Pinstriped firms like Unilever are actually at the head of the pack.
I can share in ten minutes what it took me six months to learn. And you’ll never think about your business the same way again.
The proof is in the profits.
Let’s start with the financials. Sustainable investing has grown 33% since 2014, and by 2017, $8 trillion in assets have incorporated sustainability into investment considerations. According to a recent article in the MIT Sloan Management Review, companies focused on long-term (sustainable) planning are more likely to attract long-term investors.
Companies with sound sustainability practices also have superior access to capital and pay less for it. And studies show that stock price performance is positively influenced by good sustainability practices. Who knew?
But there’s another critical reason Wall Street has cottoned on to sustainability as an investment strategy.
According to Kate Hersey, portfolio manager of Cambridge Trust Company’s Sustainable & Responsible Investment (SRI) Portfolio, “Sustainability factors such as customer satisfaction and employee engagement are leading indicators of a firm’s performance, while traditional financial factors are lagging indicators.” In other words, sustainability metrics offer significant correlation to the future value of a company and its stock. Now, that’s powerful.
Don’t believe me yet? Who were two of the CFPB’s “Top 10 Most Complained About Companies” who had the fastest growth in complaints in June 2016? You guessed it—Equifax and Wells Fargo—and this was well before either company’s crisis broke.
So what is sustainability anyway?
Sustainability is typically characterized by three broad themes, known in shorthand as “ESG:”
- Environmental Impact
- Social Impact
- Governance and Infrastructure
Cambridge Trust’s Sustainability Committee, chaired by Hersey, has thoughtfully developed each of these themes into characteristics that are helpful in evaluating where a given company falls in the sustainability spectrum. Let’s take a brief look at each, and how it might apply to a financial institution.
- Environmental Impact
This theme is probably the one most associated with sustainability. It involves creating a culture focused on environmental impact, conservation, and long-term sustainability. Banks can have a meaningful impact in several areas:
- Responsible lending practices
- Healthy workplace
- Energy conservation
- Sustainable building practices
- Public transit, clean energy, and other specialty lending practices
- Social Impact
Outside of SRI circles, this theme isn’t commonly associated with the concept of sustainability. But social impact is already an essential consideration for most banking institutions. Social impact can be defined in a multitude of ways—loosely categorized as community, diversity, and employee engagement.
Community – From the community standpoint, sustainability is evidenced by:
- Deep relationships with local non-profits
- Affordable housing and community development
- Bank-wide community volunteerism
- Long-term relationships with community partners
Diversity – Studies strongly support the idea that diverse management teams make better decisions and are more innovative. Additionally, companies with workforces that mirror the make-up of their communities tend to attract members of the community as customers at a faster rate. Ensuring diversity in hiring, training, communication, and opportunity will directly lead to these enhanced growth outcomes.
Employee engagement, development, and well-being – Sustainable companies know they are only as good as their people, and they have institutionalized programs to select, motivate, develop, and advance the best and brightest in their industry.
- Governance and Infrastructure
This is probably the least understood of the three themes, and the most difficult to actuate. It includes such things as:
- Defining a long-term mission or purpose
- Creating a purposeful positive culture
- Ensuring sustainability within the bank’s culture, core values, and strategic decision making
- Keeping the Board of Directors involved
Cambridge Trust’s Sustainability Committee has also identified three additional focus areas it uses to evaluate companies for their commitment to sustainability:
- Sustainable service
- Sustainable growth
- Messaging and alignment
Sustainable service – Maintain a service culture that is client focused and consistently delivers a level of service that builds client satisfaction, loyalty, retention, and referrals.
Sustainable growth – Prioritizing sustainability in growth initiatives during strategic planning and in key performance metrics. If you can’t sustainably grow over the long term, it’s probably not worth doing or measuring.
Messaging and alignment – Hersey suggests it’s not enough for an organization to do all of these things quietly. Employees in the company, customers and communities, and investors all need to be aware and understand what the organization is doing and why it matters. Internal and external communication through a full range of written, electronic, and public relations vehicles is needed to maximize the positive impact of sustainable corporate behavior.
So what’s a community bank to do?
If you’re like most community banks, you see a lot of familiar territory in here. But if it’s not aligned into a sustainable strategy and practice, your organization is unlikely to reap the full benefits. Here are five things you can start working on immediately to build the “Sustainability Bridge” from strategy to superior sustainable growth:
- Educate senior management about the link between sustainably responsible companies and superior financial performance.
- Educate senior and middle management on the elements of sustainability and why each of them is important.
- Work with management to establish ongoing programs and success metrics for each of the elements.
- Link sustainability with strategic planning to ensure that growth strategies and metrics are sustainable (e.g., NOT tied to products owned per household, which is inherently unsustainable).
- Establish effective internal and external communication programs surrounding your sustainability efforts. And don’t forget investor relations!
As Hersey said, “More and more companies are talking about sustainability in investor presentations as they recognize that it’s essential to the future viability of their business. As a community bank, there are opportunities to differentiate yourself and position your bank for long-term growth with a targeted focus on sustainability.”
Mark Gibson is senior consultant at Capital Performance Group, a strategic consulting firm that provides advisory, planning, analytic, and project management services to the financial services industry.