2. Literature review
2.3. Sustainable investments’ performance: the banking industry
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2.3. Sustainable investments’ performance: the banking industry
After, an introduction to responsible investments in the world and a presentation that goes more into details in Europe (best practices and strategies), this third and last part of the literature review will be concentrated on the banking industry’s performance. If it is not specified, Europe, as in the previous subsection of the literature review, refers to the European Union. Furthermore, as mentioned previously, this study is concentrated on cash and cash equivalents through sustainable banks.
Often understudied by the research community, cash and cash equivalents remain an interesting option for investors wishing to have an impact without taking many risks or losing time on managing a portfolio. Cash and cash equivalents are the most liquid assets in a balance sheet.
They usually refer as deposits that can be found in any financial institution such as sustainable banks, banks with CSR policy, credit unions and loan funds (Wood, 2007). They also refer to marketable securities which “are liquid financial instruments that can be quickly converted into cash for a reasonable price” (Investopedia, 2019). As part of this research, only literature about deposits and sustainable banks will be exhibited as this study will concentrate on this theme.
Indeed, this is the own category of cash and cash equivalents that offer sustainable options.
With cash and cash equivalents, investors usually have a large range of options such as supporting: local and responsible companies, low-income real estate projects, education for children in undeveloped countries, environmental projects like energy transition or land rehabilitation (Wood, 2007). And these actions do not ask more effort to individuals than opening savings account in one of the sustainable banks.
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responsible vision of finance. They are called “Global Alliance for Banking on Values” (GABV) and “European Federation of Ethical and Alternative Banks” (EFEAB). The second organization is also generally called FEBEA (the French acronym), even in the English versions of its website and reports. Founded in 2009, “the Global Alliance for Banking on Values (GABV) is a network of banking leaders from around the world committed to advancing positive change in the banking sector. Our collective goal is to change the banking system so that it is more transparent, supports economic, social and environmental sustainability, and is composed of a diverse range of banking institutions serving the real economy” (Global Alliance for Banking on Values (GABV), 2019). GABV counts 53 full members and 11 partners worldwide. In the European continent, 13 financial institutions and 9 in the European Union (EU) belong to this organization. The United Kingdom (UK) banks are still considered as members of European Union banks, as the UK is still part of the EU at the time of this thesis.Indeed, the UK will only leave Europe in October 2019. All these banks follow the six GABV key principles which are: triple bottom line approach, the real economy, client-centered, long-term resiliency, transparency and culture (GABV, 2018). Two of these principles may need further description: the triple bottom line approach and the culture. Firstly, the triple bottom line approach is a commitment for the people, the planet and the prosperity. All these points are important, but the last point is worth reminding it. Indeed, most of the individuals when they think about sustainable banks perceive them as philanthropic institutions. Nevertheless, to be a sustainable company, prosperity is necessary. Secondly, culture refers to the entity’s values and how it applies them in all its processes. These values include social, cultural, environmental and economic transformation (GABV, 2018).
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Another similar non-profit organization, the FEBEA founded in 2001 by 6 European banks, is only focused on Europe. Nowadays, “FEBEA federates 26 members (12 banks, 8 savings, and loans cooperatives, 4 investment companies and 2 foundations) based across 15 European countries” (FEBEA, 2019). Some members of FEBEA are also members of GABV. Indeed, FEBEA’s objectives are common to GABV’s ones. Apart from defending the cause of a more responsible finance and fairer society, supporting the exchange of information between financial managers, having a political role in EU institutions and helping its members to accomplish their goals regarding sustainability are the essential FEBEA’s ambitions. In some key financial figures, FEBEA represents in 2018, 30.5Bn euros of assets, more than 670,000 clients and 18Bn euros in loans (FEBEA, 2018). The organization’s slogan is “by the people for the people” which means that transparency and human rights are key points for the entity (FEBEA, 2017)
Even if these two organizations and the banks that composed them represent only a small part of the banking industry in terms of value and number of banks, they are pioneers in a segment of finance which has continuous and consistent growth. As evoked previously, investors are more sensitive than before to ethical and environmental issues. Hence, these banks are there to offer them the opportunity to put their money in a very safe and insured savings account, that will be dedicated to a cause they can choose. For instance, Merkur Cooperative Bank in Denmark among others offers some support accounts such as the Amnesty account, the climate account, the “save the children’s” account, the nature account and the WWF account (Merkur Cooperative Bank, 2019). A customer can choose to put his savings into one of these accounts and know exactly for what his money is used for. This type of initiatives can difficultly be found
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savings accounts are lent to. Indeed, systemic banks suffered from many scandals over the years.
One of the most emblematic concerns BNP Paribas in 2015. It was discovered in 2015, that in 1994 during the Rwandan genocide, BNP Paribas authorized the transfer of the actual equivalent of 1.14 million euros from the National bank of Rwanda to an arms broker. At this period, this type of transactions was totally forbidden by the United Nations (Gounon, 2017).
This action was a violation of the embargo enforced by the United Nations. And if BNP Paribas would have asked its customers and be transparent about the use of their savings in 1994, it is likely they would not have supported this transaction. Unfortunately, this kind of transactions is more frequent than we think. What we see is only the emerged part of the iceberg.
Hence, if individuals in Europe have a growing interest in sustainable investments (Schroders, 2016), it is also because they cannot accept any more unethical behaviors from their banks.
However, as enunciated previously, social and environmental promotion is automatically linked to philanthropy in people’s mind. A large majority of the society does not know about ethical finance and thinks, wrongly, systemic banks are its own safe and profitable option. But this is not the case. Three main criteria should be taken into account while making the decision to open a bank account: profitability, safety and return on investment. And, the members of the two associations presented above can offer satisfactory alternatives to systemic banks. Indeed, European ethical banks are “much more oriented to offering services to the real economy compared to systemic banks, they have a stronger capital position and are more profitable (in terms of ROA) and less volatile” (Fondazione Finanza Etica, 2017). Contrary to systemic banks versus ethical banks in Europe, for the period 2011 to 2016, the ethical banks’ ROA (Return on Assets) which is a measure of financial performance, is almost twice the value of the systemic
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performance, is almost the same for the two kinds of banks, whereas before the financial crisis systemic banks’ ROE was almost twice sustainable banks’ ROE. This gap resorbed because systemic banks have not been able to come back to the pre-crisis incredible performance, which was also at the costs of many risks. This explains the higher volatility of systemic banks’
financial ratios. Opposite to sustainable banks, even during the most severe period of the subprime crisis, their ROE remained stable.
Figure 5: ROE.
A comparison between ethical and systemic banks - Fondazione Finanza Etica
Some other KPI (Key Performance Indicators) can be emphasized. Indeed, growth in total assets, loans, deposits, net equity and net income are good measures of a bank’s performance over the years. All these growth measures either in the last five years or the last 10 years are in favor of sustainable banks. For example, according to the report’s sample, in the past five years, the deposits’ value in sustainable banks increased by four times the systemic’s ones (12.55%
against 3.18%). The loans’ value in the sustainable banks grew by 8.53% against 0.12% for the systemic banks. These numbers are meaningful because the sample chosen by the Fondazione Finanza Etica take into consideration all the sustainable banks in Europe and the fifteen largest European banks (appendix 1). But of course, as it is only a sample and does not represent the entire banking sector in the European Union.
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To conclude, nowadays, ethical banks seem to be safer and as or almost as performant as systemic banks (Fondazione Finanza Etica, 2017). These findings are essential to investors to be able to choose the proper bank to put their savings in. Last but not least, savings accounts generally offer interest rates to customers to encourage them to depose their money at the bank.
This criterion has not been studied yet and will be one of the study topics of this thesis.
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