社會責任投資之可能性：歐盟投資人觀點之社會責任投資與傳統投資績效之比較（2014-2018） - 政大學術集成

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(1)國立政治大學商學院國際經營管理英語碩士學位學程 International MBA Program College of Commerce National Chengchi University 碩士論文. 政治大立Master’s Thesis. ‧ 國. 學 ‧. 社會責任投資之可能性：歐盟投資人觀點之社會 sit. y. Nat. 責任投資與傳統投資績效之比較（2014-2018） er. io. Sustainable investment: A comparison of sustainable and. n. al v i systemic banks’ performance from an investor perspective in n C hengchi U. European Union (2014-2018). Student: Alice Tharaud Advisor: Professor Carol Lin. 中華民國一〇八年六月 June 2019. DOI:10.6814/NCCU201900285.

(2) 社會責任投資之可能性：歐盟投資人觀點之社會責任投資與傳統投資績效之比較（2014-2018） Sustainable investment: A comparison of sustainable and systemic banks’ performance from an investor perspective in European Union (2014-2018). Student: Alice Tharaud. 研究生：譚艾莉指導教授：林月雲. 立. Advisor: Carol Lin 治政大. ‧ 國. 學國立政治大學. ‧. 商學院國際經營管理英語碩士學位學程. n. A Thesis. y. sit. io. al. er. Nat. 碩士論文. v. i Submitted C to International MBAnProgram. hengchi U. National Chengchi University in partial fulfilment of the Requirements for the degree of Master in Business Administration. 中華民國一〇八年六月 June 2019. DOI:10.6814/NCCU201900285.

(3) . Acknowledgements Writing a master thesis is a long journey that starts from a broad idea and ends with some new contribution to the existing literature. This task is not easy and requires focusing on a long-term project and improving some key skills such as organization, patience, critical thinking, and analytical capability. Even if a thesis is an individual work, I would not have had accomplished without the help of. 政治大. several people that I would like to acknowledge in this section, to express my thankfulness for. 立. their support and their advice during this process.. ‧ 國. 學. First of all, I would like to thank my thesis advisor, Mrs. Carol Lin for her time and her guidance.. ‧. She always answered me in very short delays highlighting some areas of improvements.. sit. y. Nat. Then, I would like to express my gratefulness to the banks that took the time to answer my. n. al. er. io. questions, with a special mention to Triodos and Mrs. Palmer for granting me an interview.. v. Without their help, it would have been impossible to find some key information.. Ch. engchi. i n U. Furthermore, I would like to thank my family, my parents, and my two brothers, for sending me so many encouraging messages from France and patiently listening about my advances. Also, I would like to acknowledge my friends abroad and in Taiwan, with a special mention to the members of my thesis working group: Simon Deutsch, Célia Bourdel and Alice Laval, for their support and advice. Last but not least, I would like to thank National Chengchi University and IESEG School of Management for providing me the opportunity to work on a topic which is meaningful to me.. i. DOI:10.6814/NCCU201900285.

(4) . Abstract Sustainable investment: A comparison of sustainable and systemic banks’ performance from an investor perspective in European Union (2014-2018) By Alice Tharaud Increased concern regarding environmental, social and governance (ESG) issues have created. 治政 a new type of investment opportunities that promotes a 大 more sustainable economy. This thesis 立 aims to study the performance of the cash and cash equivalents asset class from an investor ‧ 國. 學. perspective, by comparing the sustainable and systemic banking industry. Many studies were. ‧. conducted about other asset classes such as mutual funds, stocks, and bonds, in Europe and the United States. However, this thesis enriches the current literature by also analyzing an under-. y. Nat. io. sit. researched asset class, concentrating on European Union and adding a new aspect to the. n. al. er. definition of performance: interest rates.. Ch. engchi. i n U. v. Through literature review, quantitative analysis and interviews this research put in comparison sustainable and systemic banks’ performance from an investor perspective. However, this study is subjective on the writer’s point of view as much as on the data availability and the interviewees’ declaration. Last but not least, the analysis and recommendations provided are only consistent for the period (2014 to 2018) and is highly dependent on the sample and the choice of variables. Keywords : (Sustainable Investment), (Banking), (European Union), (Performance), (Cash and Cash Equivalents), (Savings) ii. DOI:10.6814/NCCU201900285.

(5) . TABLE OF CONTENTS 1. Introduction ...........................................................................................................................1 2. Literature review ..................................................................................................................5 2.1. Sustainable investment globally ......................................................................................5 2.1.1.. History ........................................................................................................................... 5. 政治大 2.2. Sustainable investment 立in Europe ..................................................................................13 Investment strategies and firms’ best practices.............................................................. 8. 2.2.1.. Regulations and key figures......................................................................................... 13. 2.2.2.. Market study and asset allocation ................................................................................ 17. ‧. ‧ 國. 學. 2.1.2.. 2.3. Sustainable investments’ performance: the banking industry ........................................21. y. Nat. io. sit. 3. Research Methodology .......................................................................................................27. n. al. er. 3.1. Assumptions ...................................................................................................................27. Ch. i n U. v. 3.2. Sample description .........................................................................................................28. engchi. 3.3. Data collection ...............................................................................................................29 3.4. Calculations....................................................................................................................31 4. Results and analysis ............................................................................................................35 4.1. Banks’ structural performance .......................................................................................36 4.2. Banks’ accounts interest rates as a proxy of performance .............................................46 4.3. Banks, present and future: An interview of Mrs. Andrea Palmer (Triodos) ..................50 5. Discussion and limits ..........................................................................................................53. iii. DOI:10.6814/NCCU201900285.

(6) . 6. Conclusion ...........................................................................................................................58 7. Bibliography ........................................................................................................................60 8. Appendices ...........................................................................................................................63. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. iv. i n U. v. DOI:10.6814/NCCU201900285.

(7) . List of Figures, Tables and Graphs. Figure 1 : Strategies termination (GSIA report) .........................................................................8 Figure 2: ESG score range, Thomson Reuters ............................................................................9 Figure 3: Climate regulations timeline, State Street .................................................................14 Figure 4: SDG investing, Bridges Venture Spectrum of Capital ..............................................16. 政治大 Etica ..................................................................................................................................25 立. Figure 5: ROE. A comparison between ethical and systemic banks - Fondazione Finanza. ‧ 國. 學. Table 1: Evolution of ROAA ....................................................................................................36. ‧. Table 2: Evolution of ROAE.....................................................................................................38. sit. y. Nat. Table 3: Evolution of equity to total assets ...............................................................................40. io. er. Table 4: Evolution of loans to total assets ................................................................................42. al. n. v i n Ch Graph 1: Evolution of ROAA ................................................................................................... 37 engchi U Graph 2: Evolution of ROAE ...................................................................................................39 Graph 3: Evolution of equity to total assets ..............................................................................41 Graph 4: Evolution of loans to total assets ...............................................................................43 Graph 5: Ratios five-year average ............................................................................................45. v. DOI:10.6814/NCCU201900285.

(8) . 1. Introduction In 1896, following the works of several European scientists, Svante Arrhenius, a Swedish physicist, was the first one to quantify the effect of global warming due to the natural greenhouse effect. Since the industrial revolution, gases emissions kept on rising with a quick acceleration starting in the eighties, leading to an artificial increase in the world's temperature. Meanwhile, almost forty years ago, structured awareness was raised worldwide by scientists about environmental issues. It became obvious that our economic model was not suitable for. 治政 our planet. What could have been considered during the 大previous years as isolated incidents 立 were, in fact, the premises of a silent and terrible environmental crisis. ‧ 國. 學. From the eighties to nowadays, governments have tried to implement new laws and discussed. ‧. global agreements, such as the Paris Agreement. Unfortunately, the discussions take long time,. sit. y. Nat. and the outcomes do not fit the emergency of the situation. Even in the best scenario, we are. n. al. er. io. still far from remaining under the objective of 1.5-degree Celsius global temperature. v. augmentation. Hence, governments should not be the only ones to deal with the climate change. Ch. engchi. i n U. issue, as everyone from the companies to the individuals live on the same planet, are and will be impacted. There is no planet B. Unfortunately, one of the worst default of humans is avidity. But as a Native American said: “When the last tree is cut down, the last fish eaten, and the last stream poisoned, you will realize that you cannot eat money”. Indeed, a report sent to United Nations in April 2019 mentioned that we are officially in the 6th mass extinction the Earth has faced in its history. The last one provoked the dinosaurs’ disappearance. Thus, a joint effort from both companies and individuals is required. Since the eighties, with a boost starting in years 2000, corporate social responsibility (CSR). 1. DOI:10.6814/NCCU201900285.

(9) . became from a broad idea delegated upstage to an entire service like marketing or accounting in most of the big companies. With the emergence of the Internet and social media, branding awareness has never been as easy and companies suffering from scandals endure huge losses such as Volkswagen scandal in 2015. The CSR’s definition given by Investopedia says that: “Corporate social responsibility (CSR) is a self-regulating business model that helps a company be socially accountable to itself, its stakeholders and the public […] companies can be conscious of the kind of impact they are having on all aspects of society including economic,. 政治大. social and environmental”. Even if several studies showed the impact of irresponsible behaviors. 立. on companies’ performance (Grossman, 2005), it is not easy to measure and even less predict. ‧ 國. 學. the cost of such behavior.. ‧. So, to try to measure how “responsible” is an enterprise, some complex tools like the ESG. sit. y. Nat. (Environmental Social Governance) combined score in Thomson Reuters and strategies were. io. er. created. Environmental, social and governance are the three score’s components that define the level of responsibility of a company. Added to this, another parameter, the ESG controversies. al. n. v i n C h The ESG score score pools ten categories of controversies. e n g c h i U and ESG controversies combined,. make the ESG combined score composed of more than 400 measurements making all types of public companies comparable. The ESG combined score is not a static measure as it is refreshed every week and keep on track companies’ actions, announcements, and scandals. Even if all the public companies are not listed, Thomson Reuters is constantly adding new indexes, listing 6750+ firms worldwide and 1200+ in Europe (Thomson Reuters, 2019). This score was used in most of the previous works to define whether or not a company could be considered as a sustainable entity.. 2. DOI:10.6814/NCCU201900285.

(10) . But why should a company invest money to get a good ESG score? According to the shareholder wealth maximization theory, companies should only concentrate on making profits to increase their share price and to offer dividends. This is the own aspect that should affect shareholders in accordance with this theory. But, ESG combined score is used by many investors in their decision-making process nowadays. We can identify several reasons why people consult this measure. First, people get willing to make a good impact and are tired of hearing of environmental, social and governance scandals from the firms which are part of their. 政治大. portfolio. Secondly, these scandals increase their portfolio’s volatility and often decrease their. 立. expected returns. Thirdly, it becomes clearer for everyone, and even more for younger. ‧ 國. 學. generations, that our lifestyle must drastically change if we simply want to survive. So, if you are an investor and you can be part of a positive change while having good returns, and it is as. ‧. easy to buy and sell these assets as the systemic ones, why would not you want to invest your. Nat. sit. y. savings in? These reasons explain the appearance of sustainable investment. Socially. n. al. er. io. responsible investments (SRI), also called responsible investments (State Street, 2018),. i n U. v. consider the environment, social and governance criteria while generating positive returns and making a good impact.. Ch. engchi. With half of the world SRI’s assets value, reaching around €14.1 trillion in 2018 (Global Sustainable Investment Alliance report, 2018), Europe is one of the main hubs in sustainable investment for a long time with €476 billion value of ESG funds. Almost half of the world’s green bonds are listed in Luxembourg (State Street, 2018). Furthermore, Europe demonstrates a fast growth in its SRI assets’ value which should keep on growing with the new sustainable finance proposals from the European Commission. Moreover, it offers diversified sustainable choices in terms of asset classes: cash and cash equivalents (through sustainable banks) fixed 3. DOI:10.6814/NCCU201900285.

(11) . income, public equities and mutual funds. In the context of this thesis, cryptocurrencies will be put aside as it is still a debate rather it is, or not an asset. In any way, cryptocurrencies are actually not financial assets and belong to another standard (IFRS Interpretations Committee, 2019), and this thesis will rely on it. Hence this study will focus on the banking industry, loans and deposits because it is the main category of cash and cash equivalents an individual can have access to. The aim of this thesis. 政治大 banks an interesting opportunity from an investor’s perspective studying the years 2014 to 2018. 立. is to show whether or not sustainable banks’ performance in European Union makes sustainable. ‧ 國. 學. A comparison with systemic banks in European banks, their competitors, will be done to assess sustainable banks’ performance.. ‧. To do so, in the first part of this research, the literature review will be used as a framework to. Nat. sit. y. get a better understanding of sustainable investment and highlight the existing literature on the. n. al. er. io. chosen topic. The second part will be the research methodology presenting the assumptions, the. i n U. v. sample description, the data collection, and the calculations. In the third part, the results and. Ch. engchi. analysis will display a comparison between sustainable banks and systemic banks’ performance between 2014 and 2018. In this research, the words responsible and ethical will be considered as synonyms of sustainable while referring to sustainable banks. As well as systemicand systemic while referring to systemic banks. Finally, the discussion will compare this thesis’ results to previous works findings in Europe and in the rest of the world. It will also emphasize the limits of the study and provide some recommendations for further research on this topic.. 4. DOI:10.6814/NCCU201900285.

(12) . 2. Literature review At first, the following literature aims to present the previous studies done about sustainable investment in the world and more specifically in Europe. It intends to design a framework that will help the reader of this paper to understand the challenges and outcomes of the ensuing study. Thus, it starts from a global perspective to progressively concentrate on Europe. In a second time, it will focus on the existing literature about cash and cash equivalents and the banking industry’s performance. 立. 政治大. 2.1. Sustainable investment globally. ‧ 國. 學. In the first subsection of this literature review, the history of sustainable investment will be. ‧. introduced from its emergence to nowadays. Then, a more complex definition of sustainable investment will be provided by analyzing the strategies and best practices of sustainable finance.. y. Nat. io. sit. In the second subsection, an overview of the legal frameworks and some key figures in Europe. n. al. er. will be displayed to enable to analyze the market situation and provide a first examination of. Ch. i n U. v. the implementation of socially responsible investments (SRI) assets in retail investors’ portfolio.. 2.1.1. History. engchi. Socially responsible investing (SRI) refers to any investment strategy which aims to reach both financial performance and positive environmental and social change (Polivka, 2013). At first, in 1960, SRI was more oriented towards the social aspect, as awareness about the greenhouse effect and climate change only started to be raised in the eighties. The first concerns in the modern era about social issues were towards civil rights, gender equality, and labor conditions. These first actions were not about investing in social companies that were implementing new innovative policies, but rather boycotting some specific corporations judged for their bad. 5. DOI:10.6814/NCCU201900285.

(13) . behaviors. As an example, SRI had an important role at the end of Apartheid in South Africa in 1994. There was a lot of pressure on fund managers during this period to make them avoid investing in firms operating in South Africa. But SRI, as we know it nowadays, emerged in the middle of the eighties after huge disasters such as Bhopal and Exxon Valdez. The Bhopal and Exxon Valdez were a huge scandal at a time when scientists were raising concerns about the threat of an environmental crisis. On March. 政治大 Even if this kind of incidents is not isolated, this accident is considered as one of the most 立 24th, 1989, Exxon Valdez, an oil tanker struck the Gulf of Alaska spilling 37 metric tons of oil.. ‧ 國. 學. dramatic ecological disasters caused by humans ( (Encyclopaedia Britannica, 2019). At the. same time, other industries such as tobacco, fast food, clothing, and chemical industry began to. ‧. be criticized for their negative social and environmental impact. Some companies faced some. sit. y. Nat. share value losses or less enthusiasm from investors as awareness grew. SRI gained also more. io. er. and more popularity as the Internet developed at the end of the nineties, beginning of 2000. Indeed, it allowed individuals to get to have access to information much more easily. In 1990,. al. n. v i n C hnumerous and popular SRI mutual funds became sufficiently e n g c h i U to create an index to measure their performance. The Domini Social Index constituted of 400 large capitalization U.S. corporations becoming the first SRI benchmark (Domini, 2019). These firms were chosen based on many environmental and social and environmental criteria. This index is still active nowadays and the company became more diversified with Domini Impact Equity Fund, Domini Impact International Equity Fund and Domini Impact Bond Fund’s holding (Domini, 2019). During the financial crisis of 2008, many questions arose about the world’s economic interdependence and highlighted two major points: the role of central banks in the society’s green transformation and the critical role of investors. 6. DOI:10.6814/NCCU201900285.

(14) . In 2008, the crisis was so severe that the world needed to find some culprits. Lehman Brothers, Goldman, Moody’s were all designated as the main culprits of this huge crisis. But they were not the only ones to be pointed at, central banks were also criticized for not having been able to safeguard the economy (Goodhart, 2011; Eichengreen, 2011; Buiter, 2012). In the following years, their roles, duties and obligations towards obviously the economic, but also the environmental and social issues were discussed (United Nations Environment, 2017). As some of the top entities of financial authorities, central banks need to incorporate environmental risks. 政治大. into their frameworks to properly ensure financial stability. However, it may not be one of their. 立. core functions to use their elaborated instruments to support green finance investment. Indeed,. ‧ 國. 學. economic stability and ecological transition can be conflicting objectives. The instruments they need to achieve environmental goals without jeopardizing their economic goals may not be. ‧. currently effective enough. Hence, central banks’ role should be clearly defined and limited, in. Nat. sit. y. the environmental field, to an assessment of climatic risks and an encouragement to all the other. er. io. financial institutions and regulators to act more sustainably and ethically.. al. n. v i n C h social responsibility Indeed, the lack of ethics and corporate in the business policies were engchi U. especially pointed at by the public opinion. Changing our business practices to a more sustainable model could not only have a positive impact on the Earth, so limiting the climate change risks, but it could also be a crucial factor to get over the financial crisis or to be at least less affected (Lins, 2017). If the role of investors is as much considered, it is because they are the ones who make the market. Indeed, companies that invest in corporate social responsibility perform better or not during a period of financial distress, if investors believe companies do, investors will invest in SRI, making the value of these firms rise. Thus, a positive difference between traditional companies and sustainable firms will definitely appear, making SRI seem 7. DOI:10.6814/NCCU201900285.

(15) . better investments in the actual economic situation (Polivka, 2013). 2.1.2. Investment strategies and firms’ best practices In 2016, the GSIA gives a more technical definition of sustainable investment including the notion of portfolio management and selection. To properly manage a portfolio and select the ESG factors to include in, some strategies can be implemented: negative/exclusionary screening, positive/best-in-class screening, norms-based screening, integration of ESG factors,. 政治大 shareholder action (Global Sustainable Investment Alliance, 2018). The largest sustainable 立. sustainability-themed investing, impact/community investing, corporate engagement and. ‧ 國. 學. strategies, related to the assets value they manage, are negative screening ($15,023.26Bn), ESG integration ($10,369.01Bn) and corporate engagement and shareholder action ($8,365.29Bn).. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. i n U. v. Figure 1 : Strategies termination (GSIA report). 8. DOI:10.6814/NCCU201900285.

(16) . Negative/exclusionary screening like other screening strategies is an avoidance strategy. It involves not investing in particular industries (such as alcohol, nuclear power, tobacco…), countries (such as countries in conflict, countries that do not respect human rights) and activities (such as gambling, animal testing,). To do so, databases from some software like Thomson Reuters or Bloomberg can be used to choose advanced filters showing only the assets respecting some predefined criteria.. 政治大 putting your money in assets or firms that do not match your values. Meanwhile, you can protect 立. The reasons for adopting this type of strategies are numerous. Firstly, you may want to avoid. ‧ 國. 學. your reputation and be transparent to your shareholders (in the case of a fund manager). Secondly, you may prefer to avoid some precise risks.. ‧. ESG integration strategy is the strategy using. Nat. or not investing in some stocks, funds, etc. When. n. al. er. io. sit. y. ESG criteria such as ESG score to decide rather. Ch. i n U. v. choosing to use ESG score on Thomson Reuters,. e n gthree chi. main. categories. are. considered:. environmental, social and governance. These topics can be declined in several sub-topics: resource use, emissions and innovation for the Figure 2: ESG score range, Thomson Reuters. environmental component, workforce, human. rights, community, product responsibility, for the social component and finally, management, shareholders and CSR strategy for the governance component. Then, when all the measures are compounded, Thomson Reuters attributes a grade ranged between A+ and D-. This score is calculated by giving some weights to each sub-topic (between 4.5% for CSR strategy and 9. DOI:10.6814/NCCU201900285.

(17) . human rights to 19% to management). The calculation of this metric is then based on the performance of other companies using a percentile score formula (Thomson Reuters, 2019). Hence, the objectives of an ESG integration strategy are as follow. Firstly, considering the increasing pressure on social and environmental factors, it can be interesting to have your portfolio covered by the risk of new regulations. Secondly, investing in a “niche” market (even if SRI can be less and less considered as a niche viewing their actual market value) and. 政治大 sustainable investments that you can talk about to your relatives without being ashamed of 立 discovering underestimated assets can be lucrative. Thirdly, it is possible to focus only on. ‧ 國. 學. participating in some unpopular activities.. The third most profitable strategy is corporate engagement and shareholder action. It differs. ‧. from the others as it is applied by the firm. Individuals can only find out if the company follows. Nat. sit. y. this engagement and decide or not to invest in. This strategy aims to empower shareholders by. n. al. er. io. letting them fill proposals presented after, to the board of directors. Then, it will discuss and. i n U. v. add some key points on it during meetings. Thus, some proposals are co-written by shareholders. Ch. engchi. and the board of directors. At the end of this process, shareholders vote for or against these proposals following ESG guidelines. This gives to the investor the unique opportunity to make a positive change from an ethical, green and strategic perspective. It also encourages more responsible business practices, including both the ESG and transparency parameters into consideration. Furthermore, it makes the company more attractive to all the investors seeking more transparency. An increasing number of firms understands the matters of climate change and the associated risks. In the same time, an important number of potential and actual investors also understand 10. DOI:10.6814/NCCU201900285.

(18) . them and asks for more transparency. Hence, different innovative CSR practices emerged during the past decades around the world (Strandberg Consulting, 2005) The first important theme is the CSR strategy development. This includes the creation of a CSR department and training of CSR awareness in employees. This department is in charge of shifting a company’s mindset about sustainable activities from a cost to an opportunity for the future (minimize a risk category, use of resources, identify win-win solutions). Then, as the. 政治大 used as a good incentive to attract new performant talents that would make the company more 立. younger generations in developed countries ask for more meaning in their jobs, CSR can be. ‧ 國. 學. profitable.. The second theme is stakeholder’s engagement which means a transparent and sincere dialogue. ‧. with them to, for example, select suppliers who target carbon neutral production activities.. Nat. sit. y. Stakeholders for a company encompass customers, shareholders, suppliers, employees, local. n. al. er. io. environment and authorities. All together can implement some innovative environmental and ethical policies that would benefit all of them.. Ch. engchi. i n U. v. The third topic to raise is competition across companies to get rewarded for their efforts in sustainable development. As an increasing part of firms have already implemented the ideas written above, some of them try to be ranked as leaders (best-in-class) by some environmental institutions or NGOs to differentiate themselves from their competitors. This practice is interesting as long as these efforts do not just fit the exigencies of some kind of CSR “award” and are made in the purpose of attracting some new investors or customers, but rather in a longterm time horizon perspective.. 11. DOI:10.6814/NCCU201900285.

(19) . The same reasoning for entities involved in some charity programs can be applied. Nestlé will be our example to underline this point. The group suffered from many scandals since its creation (Smith, 2015) and even more with the development of social media. While going on Nestlé’s website ( (Nestlé, 2019), in the CSR tab, this statement can be found: “Nestlé promotes nutrition education and physical activities among school children in rural areas through the Nestlé Healthy Kids (NHK) program and the Knowledge Sharing (KNHK) program. We have also set up purified drinking water tanks and sanitation facilities for girls in village schools to support. 政治大. the continued education of children”. But in another part of the website, the “Ask Nestlé”, a. 立. question is asked about child labor in the cocoa plantation in Ghana and Ivory Coast. This. ‧ 國. 學. question was asked in 2017 and may be due to the child slavery scandal for which a lawsuit was filed against the group in 2012. Even if Nestlé does not own the plantations, it was accused. ‧. of “tacitly supporting child slavery” and “violating its own labor code” by the Fair Labor. Nat. sit. y. Association (FLA). The answer to the previous question is not conclusive: “No company. n. al. er. io. sourcing cocoa in Ivory Coast and Ghana can fully remove the risk of child labor in its supply. i n U. v. chain”. Then, in the rest of the answer, Nestlé explains its actions to tackle child labor in the. Ch. engchi. cocoa industry (building schools, cooperation with NGO and associations, reports to local authorities). This example is one of the numerous that can be found concerning firms, but also banks, insurances companies, financial intermediaries which adopt a strategy of “greenwashing” to satisfy the public opinion (Giraud, 2019). Thus, it is capital to differentiate best practices for sustainable finance and green-washing marketing strategy. Last but not least, best practices can have similarities and differences across entities such as banks, financial services, asset management and insurance companies. Raising awareness about SRI education to employees, students and customers is one of the key best practice that can be 12. DOI:10.6814/NCCU201900285.

(20) . encountered in every financial related structure. Indeed, education is always the key to change. Therefore, some customs are also specific to each entity. Insurances companies begin to assess public risks such as health, pollution, climate change, etc. while asset management firms invest in high social and environmental projects. Banks establish sustainability screens on their portfolio and create new concepts such as “smart growth”. To conclude, strategies for investors and best practices for companies emerged in the near past. 政治大 Even though finance remains the most reluctant sector to operate the necessary changes for the 立. and more innovation can be expected in the coming decade (Strandberg Consulting, 2005).. ‧ 國. 學. ecological transition, many actions appear from the different actors involved thanks to a global. wake-up call. Sustainable investment is one of the key ways to drastically modify our economy. ‧. and is particularly present in Europe.. Nat. sit. y. 2.2. Sustainable investment in Europe. n. al. er. io. This second part of the literature review will be geographically focused on Europe. Europe, in. i n U. v. this section, defines the European Union members. All the regulations, figures and investment. Ch. engchi. opportunities illustrated thereafter concern the states members of the European Union (EU) except specific mention.. 2.2.1. Regulations and key figures Europe is part of the 195 signatories that ratified the Paris Agreement on April 22nd, 2016. Under this agreement, the European Union take the responsibility of reporting its efforts to mitigate global warming. The first and most well-known goal set is to hold the increase in the world’s temperature at least below 2°C and idealistically below 1.5°C by 2100. The second goal is to enhance our ability to face climate change impacts while not threatening food production. 13. DOI:10.6814/NCCU201900285.

(21) . The third goal is to develop a way to make finance more in adequacy with our environment, which is basically the definition of sustainable finance and even more specifically green finance. Hence, some European organs such as the European Committee start defining a new era for finance and investment in Europe. Indeed, sustainable finance, which is nowadays only a flap of finance, will become the definition of finance in the coming decades. The main goals of the incoming regulations will be to make the current market greener rather than making grow the green market side by side with the traditional market.. 政治大 Following the final report of the High-Level Expert Group (HLEG) on 立. Commission (EC) gathered on May 2018 to deliver some proposals to make the first huge step for a greener economy (State Street, 2018).. ‧. ‧ 國. 學. sustainable finance published in January 2018, the European. sit. y. Nat. These proposals aim to include more ESG instruments into institutions. io. er. and retail investors’ portfolios and help them to understand better the. level of sustainability of their investments. Named the “key pillars”,. al. n. v i n the mainC proposals as follow. Firstly, more transparency is needed. U h e n are i h gc. The new financial era will not be sustainable without being transparent. Figure 3: Climate regulations timeline, State Street. As seen in the past and even still today, the lack of transparency on financial markets does not benefit the society from a social perspective. Hence, financial institutions will have to disclose the way they include. ESG in their investment strategies. Furthermore, it will be mandatory for asset managers to explain how the investment options they market as “sustainable”, “responsible”, “ethical” can actually be called like it. Secondly, to keep on helping investors to know which activities are environmental-friendly, some unified norms will be adopted named “EU classification system”. 14. DOI:10.6814/NCCU201900285.

(22) . Once this is done, clear advice will be provided by asset managers about ESG integration in the investment decision-making process, taking into account their potential customers’ sustainability preferences. Finally, investors will have the opportunity to compare their SRI assets with some benchmarks which will be provided with a clear methodology. These proposals should be definitely created and adopted by 2022. Not only the future portfolio will be affected by new regulations but the roots of the “problem” themselves. Financial institutions will need to operate some drastic changes on an organizational level. Indeed, if asset managers. 政治大. try to attract new customers with “new and innovative sustainability strategies” meanwhile they. 立. act inconsistently with the values they market to investors, within their own company, this will. ‧ 國. 學. have an impact. The consequences will be a loss in credibility and loss in market share.. ‧. These new laws are not only a response to the Paris Agreement requirements but also to the. sit. y. Nat. increasing interest and pressure from investors to shift to greener finance (Schroders, 2016) So. io. er. far, investors still have more concerns about integrating SRI assets in their portfolio than asset managers. According to the Schroders Global Investor Study in 2016, only 12% of investors. al. n. v i n C hposition on assets ifUthey have a positive environmental or would not consider having a longer engchi social impact against 28% of advisers. Like any market, the “customers” make the market shifts,. so the number 28% may decrease to match the investors’ exigencies. As evoked previously, Europe has always been a pioneer in sustainable investment and has the largest market share in SRI assets in the world. It has seen an explosion in the different SDG (Sustainable Development Goals) investing. Indeed, SDG investing (Figure 4) in Europe is usually classified based on the investment’s focus, going progressively from traditional (ESG focus is absolutely not a priority) to philanthropy (ESG focus is the priority, return on investment is not mandatory) (Eurosif, 2018) 15. DOI:10.6814/NCCU201900285.

(23) . 政治大 Figure 4: SDG investing, Bridges Venture Spectrum of Capital 立. ‧ 國. 學. The categories considered as SDG investing are the ones in between traditional and. ‧. philanthropy: responsible, sustainable, thematic, impact-first.. y. Nat. io. sit. As in the rest of the world, Europe follows some SRI strategies that can differ a bit from other. n. al. er. parts of the world (Figure 4). The largest investment strategies are exclusions (€10,150bn),. Ch. i n U. v. engagement and voting (€4,857bn), ESG integration (€4,232bn) and norms-based screening. engchi. (€3,147bn) in 2017 (Eurosif, 2018). The growth in percentage is less significant than between the 2013-2015 period (Eurosif, 2016) which can be explained by the higher base assets that already included SRI in its portfolio. ESG integration strategy grows the most for the period 2015 to 2017 (+27%). However, surprisingly, from the sample of Schroders Global Investor Study 2016, European investors seem to have less sensitivity than the rest of the world regarding ESG issues. Indeed, on average Europeans, when making investment decisions, give a level of importance to sustainability inferior to the rest of the world. For instance, “positive impact on the environment” 16. DOI:10.6814/NCCU201900285.

(24) . has an importance of 6.5 out of 10 compared to 6.8 globally. Also, “positive impact on local social outcomes” gets the score of 6.4 against 6.7. Similar comparisons can be done for the other categories (good corporate governance, a good record of social responsibility and a positive impact on worldwide social outcomes) (Schroders, 2016). It is also interesting to notice the disparities within Europe itself. As an example, Italians, according to this study seem more sensitive to the positive environmental impact of their investments (7.1/10) than Dutch (5.9/10). The Netherlands’ score on this topic is notably surprising as it is one of the most threatened. 政治大. European countries by climate change and sea level rise.. 立. ‧ 國. 學. Investors’ sensitivity towards ESG issues keeps on increasing these past years. The most ESGoriented investors are the millennials. Indeed, the younger is an investor, the more chances he. ‧. has to be willing to invest in social and responsible assets (Schroders, 2016). And this is good. sit. y. Nat. news as in Europe, the SRI market is on an upward trend. However, in the past and still in most. io. er. cases nowadays, a global offer has been provided to individuals who often do not match their specific concerns. But diversified sustainability themes options start to be offered to investors. al. n. v i n C h the SRI marketUgrow. Apart from ESG issues, the asset to meet their different interests, making engchi. classes in which people want to invest also vary from one to another and need to be considerate by asset managers while building portfolios.. 2.2.2. Market study and asset allocation In 2017, the European Commission alerted the European Union members about the investment gap between the level of investment needed to meet the Paris Agreement targets and reality. This gap is estimated at around €180Bn of additional investments every year until 2030 (Eurosif, 2018). Even though institutions represent the largest part of the SRI, the portion of individual investors augmented exponentially between 2013 and 2017. In 2013, retail investors 17. DOI:10.6814/NCCU201900285.

(25) . represented only 3.4% of the total SRI asset value against 30.8% in 2017. Retail investors find some advantages and disadvantages following SRI strategies (Eurosif, 2018). Financial opportunity, concerns about ESG issues, contribution to local communities, long-term and stable returns are various drivers mentioned in almost equal proportions by investors. Mistrust about greenwashing followed by the lack of viable options and qualified expertise are the main concerns about sustainable investment. Interestingly, risk management is both perceived as a driver and a threat. But the threat may come from the skepticism of asset managers honesty in. 政治大. general rather than SRI asset managers in particular. In all cases, individuals’ share of total SRI. 立. asset value could keep on rising. Indeed, the “mythic” negative trade-off with returns present. ‧ 國. 學. in the collective consciousness has been overturned by several recent studies (Ibunkele, 2017). In some cases, the green and the social investment could even outperform their systemic. ‧. counterparts.. sit. y. Nat. io. er. SRI investment options are divided in several asset classes: equity (46.45%), bonds (40%), monetary/deposits (2.59%) and other (10.96%) (Eurosif, 2018). The following section will. al. n. v i n Cessential provide some financial definitions of this thesis. Equity defines h e n gforcthehunderstanding i U the company’s value. It is the difference between its assets and its debts. In investment, equity refers to corporations’ stocks. Thus, stocks are shares of a company’s wealth and their value depict what shareholders would get if the firm was liquidated. Bonds are part of the fixed income instruments. They are loans issued by entities such as corporations, governments, municipalities and supranational organizations bought by investors called bondholders. Supranational organizations are international groups in which authority goes beyond boundaries (Investopedia, 2019). In the case of SRI, a majority of the bonds come from corporations (60%) while 33% are issued by the government (Eurosif, 2018). They are called sovereign bonds. The 18. DOI:10.6814/NCCU201900285.

(26) . last 10% is split between municipal bonds and supranational bonds. Monetary and deposits also named cash and cash equivalents in a balance sheet, are liquid instruments like cash and deposits held in any financial institution. A new sort of “cash” instrument recently appeared on the investment horizon; cryptocurrencies. Therefore, its belonging to cash and cash equivalents class is discussed by many economic experts. Stocks, bonds and money market instruments can be components of mutual funds which are the most common investment vehicle for small investors. Money managers who operate mutual funds purchase a vast number of securities. 政治大. from different asset classes and various industries. Mutual funds are usually considered as one. 立. of the best options for enjoying the diversification effect and mitigating risks for retail investors. ‧ 國. 學. (Investopedia, 2019). Indeed, mutual funds do not necessarily require to be extremely wealthy compared to other investment options such as commercial papers which are usually issued in. ‧. multiples of $100,000.. sit. y. Nat. io. er. In the context of sustainable investment, SRI mutual funds have especially received interest from the financial research community. In Europe, SRI mutual funds do not outperform their. al. n. v i n Cbest-in-class conventional peers while using the (Cortez, 2014). Also, some critics were h e n g cstrategy hi U. formulated about this strategy as even though it increases the diversification effect that sometimes SRI mutual funds lack, it can be controversial to use it as a “SRI” strategy. Indeed, in the best-in-class strategy, the companies with the best ESG score in each industry are selected rather or not this score is really high. This means that a company which belongs to a questionable sector but has a “less bad” impact than its competitors, could be included in a SRI mutual fund. For instance, green mutual funds, a subset of SRI funds seem to be affected by the lack of diversification of the industries’ sectors in which they are represented. Comparative analysis performed between black mutual funds (fossil energies) and green mutual funds, from 19. DOI:10.6814/NCCU201900285.

(27) . 1991 to 2014 shows a performance decrease of the first ones and increase of the second ones over time (Ibunkele, 2017). This may be due to political and social pressure on environmental issues. Another significant finding is the underestimation, in the case of black mutual funds and overestimation, in the case of green mutual funds of risks. This incorrect assessment of risks has a direct impact on the level of demand of these funds and hence, their prices. Predicting risks and returns are the main missions of an asset manager according to the optimal. 政治大 individual to another relies on two central parameters: the investor’s level of risk aversion and 立. portfolio theory. Choosing which assets can create the optimal portfolio that differs from an. ‧ 國. 學. the amount he wants to invest. The first parameter is a vital measure of the asset allocation process. Indeed, each individual has a different degree of risk tolerance that allows him to. ‧. expect a certain level of return. The second parameter as we mentioned previously is essential. sit. y. Nat. to get the opportunity or not of investing in some assets. As evoked previously, small investors. io. er. may encounter entry barriers while wishing to purchase some assets due to their wealth. Hence, balancing risk and reward and reaching the level asked by investors is the most complicated. al. n. v i n C h in many cases, challenge of asset managers. Nowadays, e n g c h i U a new parameter, ESG, needs to be included in the balance making managers feel like the equilibrium they try to reach is even less. stable than before. Nevertheless, rather than a risk, sustainable investing should be and begin to be considered as an opportunity. Europe has the chance to make a drastic and much-needed change to let the future generations have a future. And this will not be done without a change from traditional to sustainable investment.. 20. DOI:10.6814/NCCU201900285.

(28) . 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. 政治大 Often understudied by the research community, cash and cash equivalents remain an interesting 立 sustainable banks.. ‧ 國. 學. 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. sit. y. Nat. banks, banks with CSR policy, credit unions and loan funds (Wood, 2007). They also refer to. io. er. 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. al. n. v i n C hbe exhibited as thisUstudy will concentrate on this theme. deposits and sustainable banks will engchi 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.. 21. DOI:10.6814/NCCU201900285.

(29) . Indeed, many banks in Europe are members of two organizations which embrace a more 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. 政治大. that it is more transparent, supports economic, social and environmental sustainability, and is. 立. composed of a diverse range of banking institutions serving the real economy” (Global Alliance. ‧ 國. 學. 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. Nat. sit. y. members of European Union banks, as the UK is still part of the EU at the time of this thesis.. n. al. er. io. Indeed, the UK will only leave Europe in October 2019. All these banks follow the six GABV. i n U. v. key principles which are: triple bottom line approach, the real economy, client-centered, long-. Ch. engchi. 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).. 22. DOI:10.6814/NCCU201900285.

(30) . 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. 政治大. accomplish their goals regarding sustainability are the essential FEBEA’s ambitions. In some. 立. key financial figures, FEBEA represents in 2018, 30.5Bn euros of assets, more than 670,000. ‧ 國. 學. 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). sit. y. Nat. n. al. er. io. Even if these two organizations and the banks that composed them represent only a small part. i n U. v. of the banking industry in terms of value and number of banks, they are pioneers in a segment. Ch. engchi. 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 in most systemic banks, where there is little or no transparency about to whom the deposits on 23. DOI:10.6814/NCCU201900285.

(31) . 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. 政治大. likely they would not have supported this transaction. Unfortunately, this kind of transactions. 立. is more frequent than we think. What we see is only the emerged part of the iceberg.. ‧ 國. 學. 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.. Nat. sit. y. However, as enunciated previously, social and environmental promotion is automatically linked. n. al. er. io. to philanthropy in people’s mind. A large majority of the society does not know about ethical. i n U. v. finance and thinks, wrongly, systemic banks are its own safe and profitable option. But this is. Ch. engchi. 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 banks’ one. Furthermore, the post-crisis ROE (Return on Equity), which is another measure of 24. DOI:10.6814/NCCU201900285.

(32) . 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.. 立. 政治大. ‧. ‧ 國. 學 er. io. sit. y. Nat. Figure 5: ROE. A comparison between ethical and systemic banks - Fondazione Finanza Etica. al. Some other KPI (Key Performance Indicators) can be emphasized. Indeed, growth in total. n. v i n assets, loans, deposits, net equityCand net income are U measures of a bank’s performance he n g c h i good 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. 25. DOI:10.6814/NCCU201900285.

(33) . 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.. 立. 政治大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 26. i n U. v. DOI:10.6814/NCCU201900285.

(34) . 3. Research Methodology The objective of this research is to assess sustainable options’ performance in cash and cash equivalents compared to their systemic counterparts’ performance, in the European Union from 2014 to 2018. The own sustainable possibilities identified in this asset class are deposits (Wood, 2007). Hence, this section aims to describe the methodology used in the case of this study: assumptions, sample description, data collection, and calculations. Among other researches, this methodology is based on the Ethical and sustainable finance in Europe by Fondazione. 治政 Finanza Etica in 2017 and Real Economy – Real Returns: 大The Business Case for Values-based 立 Banking by GABV in 2018. ‧ 國. 學. 3.1. Assumptions. ‧. Considering this research’s sample size, it is not possible to statistically test hypothesis. Hence,. y. Nat. io. sit. two assumptions will be studied in this thesis. The first one is: “Sustainable banks have a better. n. al. er. financial performance than systemic banks.”. It is the main assumption studied by the reference. Ch. i n U. v. article (Fondazione Finanza Etica, 2017) for the period 2006 to 2016. To do so, and as financial. engchi. performance is a very broad topic, several ratios will be computed and a comparison between banks for the period 2014 to 2018 will be done. The second one is: “sustainable banks offer equivalent or better savings accounts’ interest rates than systemic banks in 2018”. So far, this aspect has not been studied by the research community for ethical banks in Europe for any period. As mentioned previously, this point can complete the definition of performance from an investor’s and portfolio building perspective.. 27. DOI:10.6814/NCCU201900285.

(35) . 3.2. Sample description Contrary to the reference article, the sample of this study is only made of European Union banks. It is formed of 7 sustainable banks and 10 systemic banks. As data was not easily available for sustainable banks, the choice of only keeping the banks with all the data was done to safeguard the good quality and consistency of this thesis. Thus, Triodos in the Netherlands, Ekobanken in Sweden, Merkur Cooperative Bank in Denmark,. 政治大. Ecology Building Society in the United Kingdom, GLS Bank and Umweltbank in Germany and. 立. Banca Etica in Italy are part of our sample. One bank which was part of the Fondazione Finanza. ‧ 國. 學. Etica’s report, Crédit Coopératif in France, was deleted from the sample. Indeed, “within the terms of the French ‘Monetary and Financial Code’, BPCE is Crédit Coopératif’s central body.. ‧. As such, it ensures its liquidity and solvency, and Crédit Coopératif also shares its rating”. Nat. sit. y. (GABV, 2017). Hence, this bank is not financially independent from a systemic bank and could. er. io. skew the thesis’ results. All the sustainable banks of this study are not related to a systemic bank.. al. n. v i n C hthe same sample asUthe reference article was chosen, apart About the choice of systemic banks, engchi. from the Swiss banks, as Switzerland is not an EU member. Also, ING Bank has been excluded from this sample as their financial statements for 2018 at the time of this study are not yet published. Finally, all the data needed was not available for Standard Chartered. Hence, BNP Paribas, Société Générale, BPCE and Crédit Agricole in France, Deutsche Bank in Germany, Barclays PLC, HSBC and Royal Bank in the United Kingdom, Nordea Bank in Sweden, Banco Santander in Spain and finally, UniCredit SpA in Italy are part of this sample. These banks were chosen by the reference article because they are the main European Union’s banks in terms of total assets. 28. DOI:10.6814/NCCU201900285.

(36) . 3.3. Data collection The data collection process was divided into two parts: the data for computing the financial performance ratios and the savings accounts’ interest rates information. Firstly, the data collection process started with sustainable banks. Several difficulties appeared making this step tedious. Indeed, few recent information was available on some platforms like Thomson Reuters Eikon because most of the banks are quite small entities compared to more. 政治大. classical banks. Hence, their balance sheets and income statements from 2013 to 2018 (the year. 立. 2013 is necessary for computing 2014 growth rates ratios) needed to be collected on their. ‧ 國. 學. website. To do so, their annual reports for the different years studied were downloaded and translated. Then they were copied in an excel file. This process was highly time-consuming as. ‧. most of the banks only publish their annual reports in their country’s local language and not in. Nat. sit. y. English. Apart from this difficulty, the main problem was the difference of presentation of the. n. al. er. io. financial statements that made comparisons a bit complicated for some statements’ items.. i n U. v. Hence, most of the data come from GABV’s website in the “key figures” section of the banks’. Ch. engchi. presentation. Nevertheless, not all the banks’ key figures were available. Furthermore, only five years were presented, either from 2013 to 2017 or 2014 to 2018. So, the balance sheets and income statements for the missing years were used to fill the data. As the data from GABV was in US dollars while the banks’ financial statements were in the bank’s local currencies (Euro, Swedish krona, Danish krona, and pounds), conversions were needed. To be the most accurate possible, it was decided to use the monthly average exchange rate in December, as the annual reports are presented “as established on December 31st” for each year. Moreover, a monthly average allows excluding the risk of extreme values on a given day, hence avoiding some potential bias. This step was very important for the consistency of the results, as values in local 29. DOI:10.6814/NCCU201900285.

(37) . currency could increase from a year to another, showing a positive nominal growth rate, whereas the real growth rate (without the inflation’s impact) would be negative. And as the values were in different currencies, different inflation rates existed too. For the systemic banks, the data collection process was easier. All the data from balance sheets and income statements were collected from Thomson Reuters Eikon in US dollars to make it easily comparable.. 政治大. Secondly, the collection of the savings accounts interest rates was proceeded by looking through. 立. the banks’ websites or directly asking the banks when the information was not provided or. ‧ 國. 學. difficult to find.. ‧. Savings accounts refer to several kinds of bank accounts. The main different types of bank. sit. y. Nat. accounts are support banks accounts, term accounts, variable or fixed rate accounts, day notice. io. er. accounts, specific local accounts and “classic” savings accounts. All these accounts offer to invest money for a given interest rate that goes from 0 to 3% in the sample studied. However,. al. n. v i n C h according to several the accounts differ from one to another e n g c h i U criteria. These are, obviously, the. interest rates, but also the minimal and maximal amount to invest, the customer’s wealth and age. It also considers rather or not the savings account will support a project, the lifetime, the facilities to get a loan by opening a new account; the possibility or not to withdraw money with or without fees or just simply being authorized to withdraw without closing the account, the notice period and rather or not the savings are guaranteed up to the term. Thus, the definition of “classic” savings accounts, which will be at the center of this study, is an account for which there is no term, no maximum amount to deposit, no maximum of withdrawals, no day notice, constant interest rate and open to all customers. 30. DOI:10.6814/NCCU201900285.

(38) . As no recent literature about savings accounts was found, the data collection process and the methodology were designed by the researcher. Hence, the criterion elected to choose if an account will be reported in the database or not was that this type of accounts was present in most of the banks. Also, the “classic” bank accounts are the main accounts studied in this thesis for three reasons. The first one is the presence of these bank accounts or similar ones in almost every bank. The second reason is as they are very similar, they are easily comparable. The third and last one is that there is no restriction for the investors linked to their age or social status.. 3.4. Calculations. 立. 政治大. ‧ 國. 學. Performance is a word that has several meanings, hence several ratios needed to be computed and compared to get a complete overview. The ratios chosen are based on the ones used in the. ‧. two same reference articles evoked previously with some slights differences : return on average. Nat. sit. y. assets (ROAA), return on average equity (ROAE), loans to total assets, equity to total assets. n. al. er. io. and several growth measures (total assets, loans, equity, and net income). All these ratios are. i n U. v. percentages. The choice of ROAA rather than ROA and ROAE rather than ROE was made. Ch. engchi. because ROAA and ROAE are better indicators for banks and financial institutions than ROA and ROE. This research study’s sub-section aims to define each ratio, why it can be used as a proxy for financial performance and how it can be calculated. For each ratio, every year from 2014 to 2018 included, and an average of the five years was calculated. All the calculations were done on Microsoft Excel. In a concern of optimal accuracy, the growth ratios’ average over the five years was calculated by computing the growth rate between 2014 and 2018. For the other ratios a simple average of each year’s value was computed. 31. DOI:10.6814/NCCU201900285.

(39) . The first ratio computed is ROAA. “The ratio shows how well a firm's assets are being used to generate profits. ROAA is calculated by taking net income and dividing it by average total assets. The final ratio is expressed as a percentage of total average assets” (Investopedia, 2019). It can be calculated as net income divided by the average of the beginning and the end of the period total assets.. 𝑅𝑂𝐴𝐴 =. 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠. 治政大 Lastly, ROAA is a good proxy This ratio also demonstrates the firm’s management efficiency. 立 of profitability which is one of the performance components. ‧ 國. 學. The second ratio computed is ROAE. It is one of the most widespread measures. It is the most. ‧. important profitability metric for shareholders, as it conceptually represents the profit each. sit. y. Nat. shareholder could technically get. “Return on average equity (ROAE) is a measure of financial. n. al. er. io. performance calculated by dividing net income by shareholders’ equity. Because shareholders'. v. equity is equal to a company’s assets minus its debt, ROAE could be thought of as the return. Ch. engchi. i n U. on net assets” (Investopedia, 2019).. It can be calculated as net income divided by the average of the beginning and the end of the period equity.. 𝑅𝑂𝐴𝐸 =. 𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 7 𝑒𝑞𝑢𝑖𝑡𝑦. This ratio is usually used in comparison to a benchmark or a comparison between two companies The third ratio computed is loans to total assets. This metric aims to display banks’ contribution to the real economy. It also shows the level of diversification of its activities (lending and 32. DOI:10.6814/NCCU201900285.

(40) . investing in financial markets). But this diversification is here a synonym of risks as universal banks (banks involved in both lending and investing on financial markets’ activities) can suffer from higher losses from “gambling” on financial markets rather than lending money to customers with a relatively small probability of default. It is calculated by dividing net loans by total assets.. 𝐿𝑜𝑎𝑛𝑠 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 =. 𝑁𝑒𝑡 𝑙𝑜𝑎𝑛𝑠 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠. 治政大 in the same industry. Banks Hence, this ratio is also used in comparison to other companies 立 which are only involved in lending activities will due to their structural difference with ‧ 國. 學. universal banks have a higher loan to total assets ratio. This rate is a complement of the previous. ‧. ratios measuring the banks’ performance assessment as it also shows the banks’ solvency.. sit. y. Nat. The fourth ratio computed is equity to total assets. It shows the portion of capital a firm has, in. n. al. er. io. comparison to its total assets, and thus his ability to face unexpected losses. It also measures a. v. firm’s financial leverage. It can be calculated by dividing equity by total assets.. Ch. engchi. 𝐸𝑞𝑢𝑖𝑡𝑦 𝑡𝑜 𝑡𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠 =. i n U. 𝐸𝑞𝑢𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝑎𝑠𝑠𝑒𝑡𝑠. The higher this ratio the more secure the company is and the lower his probability of bankruptcy. Unfortunately, in the banking industry, this ratio is usually quite low due to their ease to get loans from other commercial banks and central banks. Hence, this rate is also a measure of solvency and is an appropriate proxy for sustainability. The four last ratios are growth ratios. Growth ratios demonstrate the change from a year to another and are short-term performance metrics. These ratios can also be used to assess a firm’s 33. DOI:10.6814/NCCU201900285.

(41) . riskiness by showing inconsistent growth rates between years, especially if the rate’s sign varies often from positive to negative. A growth ratio is calculated in different ways depending on the previous and actual year’s value sign. If both values are positive or the previous year’s value is positive and the actual year’s value is negative, the growth rate is equal to the subtraction of the actual value by the previous value all divided by the previous value. (𝐴𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒) 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒. 𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 = . 治政大of the previous year’s value by the If both values are negative, the growth rate is the division 立 actual value and then, minus one. ‧ 國. 學. 𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 =. ‧. 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒 −1 𝐴𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒. sit. y. Nat. Finally, if the previous year’s value is negative and the actual year’s value is positive, the growth. al. er. io. rate is equal to the subtraction of the actual year’s value by the previous value, all divided by. n. the previous year’s absolute value.. Ch. 𝐺𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 =. engchi. i n U. v. (𝐴𝑐𝑡𝑢𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 − 𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒) 𝐴𝑏𝑠(𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑣𝑎𝑙𝑢𝑒). The various growth rates studied (total assets, equity, loans and net income) are performance indicators. The higher these ratios the more competitive the company is compared from the previous year or compared to its counterparts.. 34. DOI:10.6814/NCCU201900285.