We will align our business strategy to be consistent with and contribute to individuals’ needs and society’s goals, as expressed in the Sustainable Development Goals, the Paris Climate Agreement and relevant national and regional frameworks. We will focus our efforts where we have the most significant impact.

PLEASE NOTE: The Implementation Guidance is being updated following the completion of the Consultative Process, the below is the original draft version.

Implementation guidance for Banking Principle 1

Key words and intent: strategic alignment; SDGs and Paris Climate Agreement; materiality assessment; most significant impact

The environmental and social challenges facing the global community are so urgent that banks, like all organizations, must integrate these into the heart of their decision making to ensure finance is available at the pace and scale of change needed to address these challenges.

Strategic alignment means creating consistency between the bank’s value creation model and the SDGs², the Paris Climate Agreement and other relevant national, regional or inter­national frameworks, which articulate globally agreed goals and challenges for building a more sustainable future. By aligning its strategy with society’s goals, the bank shows that its business, and the products and services it provides, can support a sustainable future while achieving long-term business benefits. It signals that the bank accepts its shared responsi­bility for shaping and securing our future. Aligning its strategy with individual’s needs means not only that the bank takes into consideration people’s economic or financial necessities, but also prevents and addresses any risk of adverse impacts on people’s rights.

The SDGs and the Paris Climate Agreement identify the most pressing societal, environ­mental and economic needs of our time. Banks have a pivotal role to play in enabling them to be delivered. While the SDGs and the Paris Climate Agreement are directed at governments, they are underpinned by a series of specific targets and programme areas, where banks can make substantial contributions and by doing so align themselves clearly with the needs of society, their countries, clients and customers.

  • Through a materiality assessment identify and assess where your banks’ portfolio and service offerings generate, or could potentially generate, the most significant positive and negative environmental, social and economic impacts related to the objectives of the SDGs, the Paris Climate Agreement and other relevant national, regional or international frameworks, such as the UN Guiding Principles on Business and Human Rights.
  • Ensure that the SDGs, the Paris Climate Agreement and other relevant national, regional or international frameworks are explicitly integrated into your business strategy and key business decisions, including your product development and capital allocation decisions.
  • Focusing on those areas where you now have, or are likely to have in the future, the most significant impacts, set and publish targets that align your business with and ensure your bank’s significant contribution to the objectives and targets set out in the Paris Climate Agreement, the SDGs and other relevant national, regional or international frame­works. (see further Principle 5: Governance and Target Setting).

Getting started…

  • Liaise with relevant (scientific) institutions, experts, civil society organizations and governmental stakeholders to ensure that your bank, notably the Board and relevant departments and committees have a comprehensive understanding of the SDGs, the Paris Climate Agreement, the UN Guiding Principles on Business and Human Rights and other relevant national, regional or international frameworks that are relevant to your bank. Build internal expertise on the environmental, social and economic topics relevant to your bank’s context, such as climate change, deforestation, pollution, biodiversity, human rights, gender, etc.
  • Conduct a materiality assessment to determine where your banks’ portfolio and service offerings generate or could potentially generate the most significant positive and nega­tive impacts related to these frameworks.
  • Align your existing or future strategic focus on sectors and technologies, type and loca­tion of clients and retail customers, products and services with the SDGs, the targets of the Paris Climate Agreement and other relevant national, regional or international frame­works. Use the climate targets and SDGs as a framework to evaluate and adapt your bank’s value creation model and strategy:
    • Identify if any current activities, portfolio focus areas, products or services to clients and customers create a barrier to the delivery of the SDGs and of the Paris Climate Agreement.
    • Conduct a materiality assessment to identify your bank’s most significant negative impacts as well as most significant (potential for) positive impacts with regards to society’s goals, taking into account national priorities and areas where your bank has competitive advantage.
    • In the identified focus areas, assess current misalignment with society’s goals and where your bank can contribute to society’s goals and seize business opportunities at the same time.
    • Adapt business strategy, governance and action plans to ensure alignment with soci­ety’s goals.
    • Develop long-term targets, KPIs and performance measurement systems to address negative impacts in the focus areas and increase positive impacts in line with the SDGs and Paris Climate Agreement. Please refer to Principle 5 for more guidance on target setting.
  • Management and Board commitment is crucial to ensure that your business strategy is aligned with the Sustainable Development Goals, the Paris Climate Agreement other relevant national, regional or international frameworks, and to ensure that this strategy is effectively implemented across the business (see detailed guidance under Principle 5).

Ensuring continuous improvement…

  • Regularly review strategy, policies and targets with the aim to ratchet up your bank’s level of ambition and contribution to society’s goals over time. In some focus areas, set targets for your bank that exceed mere alignment with the SDGs, the Paris Climate Agreement and other relevant national, regional or international frameworks.
  • Regularly consult and engage with relevant stakeholders to ensure full understanding of their expectations and of their relevant ideas and suggestions with aim at further increasing your contribution to society’s goals (see also Principle 4).
  • Take a leadership role among your peer banks and proactively reach out to and encour­age other banks to align with society’s goals and contribute to addressing local and global challenges. Enable peers’ advancement by sharing best practices and providing peer learning opportunities (see also Principle 4).
  • Provide effective incentives across the organization to foster positive action and inno­vation and establish processes and initiatives to innovate with relevant partners outside your bank (see also Principles 4 and 5).

Some key resources:

  • Regarding the SDGs:
    • UNEP FI’s Positive Impact Initiative explores solutions to addressing the financing gap for the SDGs and with the Principles for Positive Impact Finance provides a guid­ing framework for banks to holistically understand, assess and address their impacts. They are a ‘meta-framework’ intended for use across asset classes and financial instruments. Holistic impact analysis is key to the transition to the impact-based economy required to achieve the SDGs.
    • The SDG Compass: this tool has been developed by GRI, the UN Global Compact and the World Business Council for Sustainable Development (WBCSD). It provides guid­ance for companies on how they can align their strategies with as well as measure and manage their contribution to the realization of the SDGs.
    • Many of the main extra-financial rating agencies (e.g. MSCI, ISS Oekom, Sustainalytics, RobecoSam, Vigéo Eiris, Ethifinance, etc.) use the SDGs as a refer­ence to assess the sustainability performance of corporates and financial institutions. Their questionnaires and methodologies can be a valuable source of guidance and inspiration to banks that wish to align their business strategy with the SDGs.
  • Regarding the Paris Climate Agreement:
    • To ensure alignment with this global framework, the Science Based Targets initiative provides nascent tools and methodologies that enable banks to ensure that their financing strategies are consistent with what science requires to keep global temper­ature rise under the 2°C threshold.
    • The free-to-use Paris Agreement Capital Transition Assessment is an online tool which analyses exposure to transition risk in equity and fixed income portfolios over multiple climate scenarios.
    • The ISO14097 standard, which is currently under development, will tackle climate issues for the financial sector and will be designed to integrate with other ISO standards.
    • The Portfolio Carbon Initiative, a collaboration between the 2 Degrees Investing Initiative, the World Resources Institute and UNEP FI, has published a report on “Exploring Metrics to Measure the Climate Progress of Banks”, which 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.
    • Translating their commitment under the Paris Climate Agreement into national targets, plans and priorities, countries have published Nationally Determined Commitments (NDC) which provide a valuable starting point for banks wishing to understand the local priorities and the scale of action required at country level. Some NDCs are not yet fully in line with the level of CO2 reduction required to keep global warming well below two degrees. Where this is the case, banks should additionally consult availa­ble scenarios by institutions such as the International Energy Agency (IEA), and the Potsdam Institute for Climate Impact Research (PIK) and the International Institute for Applied Systems Analysis (IIASA).
  • Regarding the UN Guiding Principles on Business and Human Rights:
    The United Nations Guiding Principles on Business and Human Rights are the authoritative global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activity, by establishing the baseline responsibility that all companies have to respect human rights. The OECD Due Diligence Guidance for Responsible Business Conduct, help financial institutions to implement the diligence recommendations set forth by the Guiding Principles.
  • Regarding materiality assessment: a number of frameworks, such as the Integrated Reporting <IR> Framework and the GRI Standards offer guidance on conducting a materiality assessment.

Examples

a. Driving action towards sustainability with the help of the SDGs framework
Many banks already use the SDGs as a key framework to drive action towards sustainability. As an example, a major UK bank is reporting its contribution to the SGDs while a major French one measures and reports on an annual basis the share of its lending portfolio that strictly contributes to at least one of the 17 SDGs.

b. EU Sustainable Finance Action Plan
The EU’s sustainable finance policies make specific reference to the Paris Climate Agreement and the SDGs. This material notably includes a comprehensive framework on sustainable banking and is to set a taxonomy of sustainable activities that the banking sector should foster, providing good examples and suggestions of how a bank may align with societal goals. See, in particular, the EU “Action Plan: Financing Sustainable Growth” to find more information on what sustainable finance means to the EU Commission and how it could mobilize the European banking market.

c. The SDGs and Islamic Banking
Activities supported by Islamic banks are in line with Islamic law, which emphasizes the maximization of benefits to individuals and society and the minimization of harm (see, for example, Bank Negara Malaysia’s strategy paper on value-based intermediation). The main areas of consideration tend to be the protection of morality and life, family, intellect and wealth. These elements form the primary basis of the business screens used by Islamic banks. As the SDGs address the most necessary elements of the majority of these consid­erations, they could augment existing screens and form a useful yardstick for Islamic banks for managing both the positive and negative impacts of their activities.


² See also Report “Business Reporting on the SDGs: An Analysis of the Goals and Targets”, by UN Global Compact, GRI and PWC; the SDG Compass “SDG Compass” which provides guidance to businesses on how to align their strategies, and to measure and manage their contribution to achieving the goals; “Rethinking Impact to Finance the SDGs” by UNEP FI’s Positive Impact Initiative. The Dow Jones Sustainability Index already aligns its questions to the SDGs: http://www. sustainability-indices.com