In 2005, Hurricane Katrina hit the US southern states and wiped out 360,000 mortgaged homes, 120,000 of which had subprime mortgages. It is widely forgotten that this was the first domino to fall, exposing the flaws in the subprime-mortgage market and the chain of contagion among banks that had invested in derivative products containing bundles of these mortgages or lent to other banks that had. These derivatives were regarded as quality assets, on the basis that the probability of any significant proportion of the high-risk (subprime-mortgage) assets they comprised failing was remote.
Hurricane Katrina’s role in the financial crisis of 2008 is too readily forgotten because it exposes an uncomfortable fact – that banks, the financial system and our economies are inherently linked to the natural environment and the health of our society and that their stability and success is dependent upon them. Yet 10 years on from the height of the financial crisis, we have seemingly not learnt this fact and continue to have a banking sector which is disconnected from environmental and societal issues and which therefore undermines a fair and sustainable future for us all.
On the issue of the role of banks in climate change alone, the Big Shift Campaign in 2017 sought to highlight the issue of ‘stranded assets’ – the risk that, if we are to keep climate change below 2°C, we already have five times the levels of proven fossil fuel reserves than we could ever burn. This means that the value banks have placed on those fossil-fuel assets could be hugely over-inflated, and if governments start to react faster to climate change, these stranded assets could create huge instability in banks and the wider financial system. We are already seeing governments react to the separate issue of air pollution – the UK’s surprise diesel-car ban being one such reaction – and this is yet another example of why banks need to be better at considering the externalities of their investments, their impact on society and what future financial risks those environmental and social impacts create for the banks themselves. You can make similar business cases for banks doing so in respect of biodiversity loss, human health epidemics and more.
The conditions for the 2008 financial crisis were created even earlier, in the late 1970’s and 1980’s, when deregulation and consolidation of banking allowed it to become an industry focused primarily on using money to make more money, discarding the responsibilities of banking’s intermediary role in our economies and society. Many banks lost any real connection with the communities they serve and any sense of the impact of their investments.
I fear some are still waiting for the conditions to return to where they can simply use money to make more money. However, the days of the financial sector being the goose that can lay the golden egg are gone, and 10 years on, we need to have a new debate. We need to be discussing how to make banks socially useful.
Immediately after the financial crisis, the public debate focused on how to stop the crisis spreading, and years later it moved to how to stop it happening again, with some progress, such as banks having to hold higher capital to buffer them against shocks.
Some of these changes in themselves have killed off the golden goose, with higher costs of regulation and a reduced ability to leverage balance sheets, meaning banks can never return to the pre-crisis levels of returns to their investors. We now also know that those profits were also achieved with widespread mis-selling, rate-rigging and other scandalous practices. In the UK, such behaviours are now more preventable, with heightened scrutiny and personal liability for the senior management of banks. It is a shame, though, that, when we discuss ethics and culture in banking, the discussion remains mainly limited to not breaking the law.
I began working in banking as Head of Business Banking (UK) at Triodos Bank in March 2008. Even though we were not active in the types of investments that caused the financial crisis, no bank was unaffected by the financial crash. Indeed, one of the issues is that every bank outside the big four was dependent on them for clearing services. The fact that large systemic banks are too big to fail remains one of the big social grievances of the 2008 crisis, and we have yet to fully address it.
Similarly, if we agree that banks have an important social function, then we have to curb the excessive levels of pay and bonuses that incentivise profit maximisation. The current dominating philosophy in banks is to serve the short-term financial interests of shareholders above all else, with senior executives rewarded to deliver this. We need to realign motivations to ensure the fair distribution of the value banks generate among shareholders, customers and employees, and proper consideration of wider societal impacts.
There are wider issues to be addressed to change motivation within banks, such as how you incentivise longer-term investing by shareholders to move away from short-termism, and also to build more responsible impact reporting into corporate governance codes.
Today I am Managing Director of Triodos Bank UK. I believe it is a very important bank, not because of its systemic scale or the economic value it generates but because we try to be a reference point for how banking can be different. We seek both to finance change by only using money for positive social, environment and cultural outcomes and to change finance through seeking to constructively influence and support change within the wider banking sector. Triodos is one of 54 banks that are members of the Global Alliance for Banking on Values (GABV). We share common principles, but each bring a rich diversity of views on how banking can be different. GABV was founded in 2009 in the wake of the crisis, and these alternative banks now have $163 billion of assets under management and 50 million customers worldwide.
Last year, GABV, Mission 2020 and Finance Watch published a white paper, ‘New Pathways: Building blocks for a sustainable finance future for Europe’. This made several recommendations including that banks report their impacts aligned to the internationally agreed United Nations Sustainable Development Goals and similarly aligned sustainability assessments for all new investments. It called for greater diversity in the system and for adapting existing regulatory instruments to account for environmental and societal risks. It also advocated support to banks through training and centres of expertise to help them change.
I believe we need to see such radical reinvention of the role of all banks in our society, including the publication of all of their loans and investments, which would create a truly free market for the customer to choose within.
Even amid the growth of this movement of values-led rather than value-led banks, it can be hard to see how you can influence change within our banking system – it can all seem too complicated and beyond our capabilities. Nevertheless, we all have a role to play in demanding and driving change. I see my own role as working to prove that banking can be done differently; a bank can be a positive force for good while providing quality banking services and a credible rate of return to its shareholders. ‘Keep your nose to the grindstone’, as an old uncle of mine used to say to me. That’s what my colleagues and I try to do on a daily basis, keeping a focus on trying to be the change we want to see and challenging ourselves to keep improving.
Many traditional banks are full of good people who want to change the institutions they work for, and we are starting to see banks waking up to a growing public awareness and demand for more sustainable products and services. There is also a clear generational shift happening, and demands for social and environmental consciousness in banks will only grow. There is a risk though of ‘impact washing’ and products dressed up to be more socially or environmentally impactful than they are. So it is important that we hold banks to account on the quality of their measurement, reporting and disclosure. But it is also important we are open minded and welcome efforts to change.
Some of us, like those at Positive Money, campaign for change. We are nearly all customers of banks, some of us are also customers through our businesses or work, and many of us are investors and shareholders directly or through our pension funds. We all have a say and the opportunity to use our money as a form of democracy and a vote for change.