We will continuously increase our positive impacts while reducing the negative impacts on, and managing the risks to, people and environment resulting from our activities, products and services.

Implementation guidance for Principle 2: Impact

Key words and intent: impact assessment; people and environment; continuously increase positive impacts while reducing negative impacts; risk management

In the Preamble to these Principles banks have defined their purpose as helping to develop sustainable economies and to empower people to build better futures. To put this purpose into practice, banks need to identify, assess and improve the impact on people and environment resulting from their activities, products and services. All sectors of the economy create or have the potential to create both opportunities and positive impacts, risks and negative impacts. For the bank’s capital allocation and provision of products and services to continuously increase positive impact while reducing negative impact on people and environment, there is a need to incorporate assessment of sustainability-related risks and impacts based on all three dimensions of sustainability (environmental, social and economic) into business decision making at strategic, portfolio and transaction levels.

  • Use the SDGs, the Paris Climate Agreement and other relevant national, regional or international frameworks, such as the UN Guiding Principles for Business and Human Rights to identify and assess significant (potential) positive and negative impacts and risks resulting from the bank’s capital allocation decisions and its provision of products and services.
  • Define strategies, policies and KPIs to address, reduce and mitigate significant negative impacts and to realize opportunities to continuously expand and scale up positive impacts and put in place processes and systems to manage risks to people and environment.

Getting started…

At strategic and portfolio level:

  • Per sector, client segment and/or geography identify and assess significant (potential) positive and negative impacts using the SDGs, the Paris Climate Agreement, the UN Guiding Principles for Human Rights and relevant national policies and targets as guiding framework.
  • Integrate the results of your impact assessment into strategy decisions and portfolio allocation decisions and define strategic opportunities to increase positive impact, e.g. by expanding in certain sectors or segments.
  • Define overarching lending policies (e.g. sectoral – see key resources) and define and monitor KPI for portfolio adjustments over time to increase positive and reduce significant negative impacts.

At transaction level:

  • Establish management systems and processes (e.g. policies, procedures, monitoring) to identify and manage social and environmental risks and negative impacts.
  • Include key questions on sustainability risks in your know-your-client-process.
  • Integrate environmental and social risk in your overall risk assessment.

Ensuring continuous improvement…

  • Assess, monitor and be transparent about your total portfolio exposure to technologies, business models and sectors with significant sustainability impacts.
  • Develop and publish increasingly quantitative and forward-looking assessments of your bank’s positive and negative impacts and related risks and opportunities.
  • Put in place a ratcheting-mechanism for your impact-related KPI so your bank regularly reviews and increases its level of ambition.
  • Develop and regularly review a register of significant positive and negative impacts on and risks to people and environment and consult relevant stakeholders (see also Principle 5: Stakeholders) on it. Ensure these impacts and risks are managed/addressed across all business areas.
  • Invest in innovation and strategic development of new client/customer segments, sectors/technologies and innovative product offerings.
  • Build capacity and expertise on sustainability risk and impact assessment in credit committees, among client relationship managers and other relevant business committees.
  • Harness technology to mitigate identified risks, seize opportunities, and enable better monitoring of impacts.

Some key resources:

  • Many banks publish lists of the activities that they will not finance³. These are a useful resource for banks looking to develop their own lists, although it is noted that banks adopting such lists need to account for local regulations and societal expectations.
  • Sectoral policies have already been adopted and published by several global banks. These list the binding and evaluation criteria that their clients must meet to be eligible for capital allocation. These criteria are generally made public4, which is key for banks that aim to develop their own internal policies that are adapted to their operational contexts and market positions.
  • The Equator Principles require banks to consider risks to society and the environment as well as to the bank and set out a framework for assessing and managing social and environmental risk in project finance.
  • The IFC Performance Standards can be used to understand sector-specific ESG risks.
  • The UNEP FI Principles for Positive Impact Finance and the PI Impact Radar: The Principles for Positive Impact Finance are a framework to enable financial institutions, their clients and their investees to apply an impact lens to their business. The Principles require organizations to consider both positive and negative impacts across the three dimensions of sustainable development: economic, environmental, social. Assessing impact through a transparent, consistent and repeatable methodology is important in order to ensure that progress is being made and to enable the pursuit of positive impact across the portfolio and business co-creation with clients.The Principles for Positive Impact Finance are accompanied by two tools:
    • The PI Model Framework guides banks in developing frameworks for Positive Impact products and services.
    • The PI Impact Radar enables financial institutions to carry out holistic impact identification, by proposing 22 impact categories, backed by definitions anchored in international sources, simplified for business use. These categories capture the sustainable development needs that underpin the SDGs (macro) while offering a basis against which indicators can be used to frame and measure financial contributions to sustainable development (micro). They enable financial institutions to identify negative and positive impacts across the three pillars of sustainable development allowing them to conduct a holistic impact analysis.
  • Strategic risk assessment studies such as those produced annually by the World Economic Forum or other think tanks could assist banks when engaging stakeholders and assessing risk to their own strategies, operations, and their stakeholders as well as the natural environment.
  • NGO reports, which highlight the social or environmental impacts of lending activities are useful for ensuring a comprehensive mapping of issues and facilitating understanding of civil society expectations.
  • The UN Guiding Principles on Business and Human Rights are the globally recognized and authoritative framework for the respective duties and responsibilities of Governments and business enterprises to prevent and address adverse impacts on people resulting from business activities in all sectors, including the banking sector. To meet their responsibility to respect human rights, banks are required to exercise human rights due diligence to identify, prevent, mitigate and account for how they address impacts on human rights; and provide remediation for adverse impacts, which the enterprise has caused or contributed to. The UN Office of the High Commissioner for Human Rights, the UN Working Group on Business and Human Rights, and the OECD provide Guidance on the implementation of the UN Guiding Principles. The online Business and Human Rights Resource Center offers a useful compendium of guidance documents and tools.
  • The UNEP FI Human Rights Guidance Tool for the Financial Sector provides financial practitioners with information on human rights risks, specifically focusing on human rights issues relevant to the assessment of business relationships and transactions. This tool assists finance sector professionals to identify human rights risk and possible risk mitigation measures, as particularly relevant for lending operations. It also contains references to existing human rights standards, banking practice and further resources to help practitioners operationalize human rights due diligence.
  • The Green Bond Principles are voluntary process guidelines that provide a framework for transparency and disclosure for the issuers of Green Bonds. As such, they are primarily designed to aid investors by ensuring availability of information necessary to evaluate the environmental impact of Green Bond investments. However, as they set out a taxonomy of green activities, they are also a useful resource that banks can apply to identify and scale lending, products and services with positive environmental impacts.
  • The report on “Exploring Metrics to Measure the Climate Progress of Banks”, co-published by UNEP FI, assesses the various metrics that can be used to assess a bank’s contribution to climate change and makes recommendations for choosing climate metrics by asset class.
  • Initiatives like the Science Based Targets Initiative (see also Principle 1: Alignment), the CDP (a not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions on climate issues) or the ISO14097 framework, currently under development, are key resources regarding climate-related impacts.
  • The Dutch Platform Carbon Accounting Financials has proposed a harmonized carbon accounting approach for the financial sector. The report outlines the carbon foot printing methodologies per asset class.
  • The World Wildlife Fund (WWF) provides a free-to-use water risk filter.
  • The Soft Commodity Risk Platform (SCRIPT) is a freely available system to help financial institutions understand and mitigate the deforestation risks associated with financing companies in soft commodity supply chains.
  • The Finance Sector Supplement to the Natural Capital Protocol provides a framework for financial institutions to assess the natural capital impacts and dependencies of their investments and portfolios.
  • The Natural Capital Risk Explorer (available on UNEP FI website as of Dec. 2018) enables comprehensive risk analysis across all ecosystem services and economic sectors, using drivers of change of environmental assets such as climate change, natural disasters and human degradation.

Examples

a. Assessing and managing climate-related transition risks and physical risks
As stated by Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board, in his famous 2015 speech “Breaking the tragedy of Horizons”, three major risks related to climate change and energy transition could affect financial stability and should be carefully addressed by banks and investors: physical risks, such as impacts from floods, droughts, storms or rising sea-levels; transition risks caused by the revaluation of assets resulting from the transformation to a low-carbon economy; and liability risks that could arise if those suffering climate change losses sought compensation from those they held responsible. Banks should analyze whether their products, services and activities contribute to these risks and where there are business opportunities for the banks in mitigating these risks and supporting the transition to a low-carbon economy.

The Task Force on Climate-related Financial Disclosures (TCFD), provides corporations with a framework for assessing and reporting on their climate-related risk management strategy. The TCFD has been for example at the core of the recent EU Sustainable Finance roadmap. As a result of the UNEP FI TCFD Banking Pilot with 16 leading banks from around the world, UNEP FI has published two reports setting out an approach and methodology for scenario-based forward-looking assessment of transition-related risks and opportunities (Extending our Horizons) and approaches and methodologies for forward-looking, scenario-based assessment of risks and opportunities from the physical impacts of climate change (Navigating a New Climate).

b. Local regulations on social and environmental risks and impacts: the example of Brazil
Brazil has a regulation that requires financial institutions to develop social and environmental responsibility policies. Financial institutions are required to focus and prioritize their actions to address their most material risks and impacts. This regulation in combination with direct regulation of, for example deforestation, and similar regulation across the pension and insurance industry has helped to provide a clear vision of sustainable finance as a “new normal”.

c. Internalizing environmental costs
A major Chinese financial institution issued a paper that discusses the impact of internalizing environmental costs onto a firm’s balance sheet and the consequent risks this creates for commercial banks. A relevant theoretical framework, transmission mechanisms and analytical methodologies are established to assess the impact of tightening environmental protection standards and climate change policies, joint and several liabilities that banks are exposed to via their customers’ activities and changes in the bank’s reputational standing in the eyes of its shareholders and depositors. Two industries, namely thermal power and cement production, are selected for stress testing against a range of high, medium and low stress scenarios and the impact on their financial performance and credit ratings is assessed as a result. Actionable responses to this analysis are put forward. Steel industry has also been assessed under the same approach.

In Europe, some banks use a range of carbon prices to stress test the business model of their main clients in the high greenhouse gas emitting sectors such as energy, steel, cement, glass, transportation, agriculture, and real estate. The objective is to assess the effect on the company’s financial performance (and consequently on its credit risk) of different carbon prices and regulatory scenarios.


3 A few helpful examples among many others:
https://www.sc.com/en/sustainability/position-statements/prohibited-activities/
https://www.abnamro.com/en/images/Documents/040_Sustainable_banking/060_Strategy/ ABN_AMRO_Exclusion_list.pdf

4 A few helpful examples among many others:
https://www.hsbc.com/our-approach/risk-and-responsibility/sustainability-risk
https://www.db.com/cr/en/docs/DB-ES-Policy-Framework-English.pdf
https://group.bnpparibas/en/financing-investment-policies
https://www.citigroup.com/citi/sustainability/policies.htm
https://www.santander.com/csgs/Satellite/CFWCSancomQP01/en_GB/Corporate/Sustainability/Santander-and-sustainability/Policies-.html?cidSel=1278689256241