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Banking for Impact

Welcome to optimism

A growing movement of people are demonstrating that not only do we each have more power than we think; as citizens we may be the only answer to the biggest challenges of all.

Conflict in Ukraine and the Middle East, the threat of terrorism in Western Europe, continuing economic hardship in much of Europe, and growing fears about insufficient responses to global climate change dominated world affairs in 2014. These challenges raise important questions about values and the world that future generations will inherit.

In the last century society looked to government to solve its biggest problems. And it continues to play a fundamental role in public policy, providing the legal context for society and ensuring there is a democratic foundation to protect individual rights and responsibilities. But today’s seemingly intractable issues suggest government is increasingly ill-equipped for a complex and rapidly changing world. Rather, from Triodos Bank’s perspective, it is individuals, entrepreneurs and even the banks that finance them, that are at the vanguard of efforts to build a better world.

Evidence that the answers to our most challenging questions are coming from non-traditional sources is available from a rich variety of sources. The traction that thinkers like Thomas Piketty have had during the year, analysing the growing inequality of wealth, the catalysing impact of the people’s climate march – reported to be the largest climate march in history bolstered by over 2,500 events in 162 countries – and actions such as high profile foundations, like the Rockefeller Foundation whose fortune was built on the oil industry, and universities divesting from fossil fuel companies as part of organised campaigns, all suggest that people are looking to other institutions, individuals and increasingly themselves to improve their situation.

Movements of connected individuals and groups are increasingly able to influence the wider agenda. This approach aligns closely with Triodos Bank’s approach to finance with impact (or financing impact investments). We use savings and investments to finance values-based enterprise, enabling people to make impact investments that align the impact of their money with their values. This means our customers’ money is no longer neutral. It is used to finance specific sustainable enterprises and, as a consequence, it carries responsibility and requires social awareness.

Banks play an important role helping societies to grow and develop. We are convinced that central to this is the extent to which they finance the real economy, where their money can have the deepest impact on people’s lives. This has always been Triodos Bank’s approach and dictated much of what we did, and how we did it, during 2014.

In our view it has become more and more obvious to even the largest organisations that we are part of a financial eco-system, complete with inter-dependencies that mean we have to take account of each other’s interests. Diversity in the financial system, as in natural eco-systems, also makes it more resilient.

And Triodos Bank is not alone in its approach or its systemic perspective. Partnerships are crucial for Triodos Bank to achieve change. During 2014 we were active in local, European and global networks. We co-founded, and are part of, the Global Alliance for Banking on Values (GABV), for example. The GABV is an international network of independent sustainable banks who also integrate a values-based mission and strategy. Triodos Bank also co-founded the Sustainable Finance Lab, a network of scientists creating grounded ideas to develop a more sustainable financial system who led high profile debate about the future of the banking system during the year.

Green Shoots

We noticed positive developments during the year as some businesses and even banks appeared to embrace the sustainability agenda. Small and large companies worldwide have started to embed sustainability throughout their operations and value chain; companies whose growth rates average 15% regardless of market conditions, according to the United Nations’ ‘business case for eco innovation’, a report that Triodos Bank contributed to.

The G8 Social Investment Taskforce also published a report to encourage a step change in Impact Investing around the world to widespread interest from the mainstream. Triodos Bank, the European representative on the Taskforce, published ‘Impact Investing for Everyone’ to complement this work, arguing for a more inclusive approach to investing in positive impact so that ordinary individuals, not just wealthy investors, can participate in this fast-growing industry. Impact investing should be an option for the many and not just a few wealthy individuals and pension funds. Triodos Bank believes in a broad movement of people, the kind that has enjoyed more prominence in 2014, and has a 35 year track record to demonstrate that finance for impact is both popular and serves real needs in society.

Sustainable Innovation

The shift to a more values-based approach is part of an emerging future that is difficult to predict and changing fast. The way people invest, entrepreneurs borrow and transactions take place are developing rapidly as growing numbers of people respond to simple ways to use money that often bypass traditional banks.

Disruptive innovations in the financial industry present challenges and opportunities for banks. One of the most high-profile is the development of crowd-funding – collecting finance, often online, from a ‘crowd’ of investors to fund an initiative.

To develop the reach of our finance further we plan to explore opportunities to partner with crowd-funders, where we have something new to bring that benefits wider society and the environment. Lower levels of regulation and mutual trust from people who connect with one another easily, makes crowd funding a new ‘tool’ that’s complementary to banking and adds diversity to the financial eco system.

In 2014 UK-based green energy company, Triodos Renewables, experimented with this kind of complementary finance and worked with crowdfunding platform, Trillion Fund, to promote, distribute and learn from a share issue which raised over EUR 4.2 million.

Triodos Bank, and its stakeholders, is interested in impact-driven financial products and services. These products have grown in popularity in recent years. Sustainable mortgages, for example, which incentivise individuals to live in more sustainable homes, were increasingly popular in The Netherlands, Belgium and Spain with EUR 404 million lent (2013: EUR 274 m) during the year. These types of products offer new ways for people to live more sustainable lifestyles.

Financial innovations like these, and others such as large companies issuing green bonds, imply that banks will become part of a broader system where there is room for more innovative approaches. In 2014 Triodos Bank was instrumental in the first ever social impact bonds to benefit from Social Investment Tax Relief in the UK, for example. We want to be part of that evolution from traditional banking to a broader approach to money.

In addition, as a provider of sustainable financial products, we innovate in the development of ‘ordinary’ banking products which meet Triodos Bank criteria, such as 100% biodegradable debit and credit cards, savings accounts and fixed term deposits that allow customers to donate interest, and Point of Sale machines using Forest Stewardship Council (FSC) paper.

Equipped for an uncertain future

Against this backdrop we spent time during the year working on Triodos 2025 – a dedicated programme to explore our strategic perspective in a number of possible future scenarios.

The project was driven by a team comprising senior co-workers and members of both the Supervisory Board and Board of SAAT. It involved visits, or learning journeys, to numerous companies wrestling with the future in different ways – from an airline to a green energy company.

We wanted to learn from the experience of others to provide guidance on how best to equip Triodos Bank to deal with the emerging future, represented by a number of scenarios. These scenarios included a world dominated by big government; big business; polarized communities of ‘haves’ and ‘have-nots’; and active collaboration between civil society, business and government. We explored what role Triodos Bank had to play in them to provide, for example, complementary sustainable products and services for people who need them.

Triodos 2025’s results will be used to inform our business planning. As such they will influence the key strategic objectives that follow, in future years. We intend to share our findings from this work during 2015.

Risk Matters

As a medium sized bank we want to, and ensure we do, fully comply with our regulatory obligations. This required significant effort and resources during the year, in particular to strengthen our risk management and internal governance. Delivering a ‘step up’ in our internal governance and systems required time and effort and will position Triodos Bank well for the future. However this, coupled with meeting increasing regulatory demands, meant slower growth in our lending in particular during the year. After they have paid for their people and operations banks make a financial profit on the difference between the rates they pay savers and the rates paid by their borrowers. So less borrowing during the year limited Triodos Bank’s profitability.

These issues were discussed regularly with the Supervisory Board and, in a more general way, with the Board of SAAT to ensure these developments strengthen our position as a resilient financial institution, support the mission and values of Triodos Bank and safeguard its long-term continuity.

To maintain our position as a robust financial institution we further improved a strong capital position and managed growth in lending, deposits and investments during the year. These collective efforts meant Triodos Bank’s total assets under management were over EUR 10 billion by the year end.

However, it continues to be challenging for Triodos Bank to keep pace with and balance its lending with the continuing influx of deposits to maintain a healthy balance between the two. At the same time we plan to continue to diversify our loan portfolio as a whole and our lending within sectors, through extending further beyond renewable energy production to energy saving and energy storage and distribution projects, for example.

Another key way to address this imbalance has been to provide sustainable mortgages to private customers, incentivising home-owners to live in more environmentally friendly properties. This part of the business grew by 47% during the year, helping to deliver a ratio between loans and deposits of 68%.

This will continue to be a focus of attention in 2015 and beyond.

Hitting the target without missing the point

Triodos Bank exists to improve people’s quality of life, and only finances social, environmental and cultural sectors to do it. We are able to fulfil this mission by exploiting ‘acupunctural pressure points’, which amplify our impact beyond our immediate influence as a financer of sustainable enterprise and enhance our ability to leverage impact. This is principally done through our work as a reference point for values-based banking via networks, events and media activity, for example.

For some years Triodos Bank has been recognised as a reference point through initiatives such as establishing the Sustainable Finance Lab – bringing leading scientists together to design the models and tools required to create a sustainable financial industry – enabling Triodos Bank to contribute to much deeper and broader change. For example, the Lab has been the catalyst for a Dutch Government Committee influencing policy at a national and European level. Triodos Bank also was active in all branches in the GABV’s first global campaign to highlight values-based banking in 2014.

However, an integrated approach that puts as much weight on non-financial as financial performance can make assessing and measuring performance more complicated; this is particularly true in a financial world that measures success by numbers. So for the first time last year we produced more detail about our non-financial impact in an extra ‘impact chapter’. The chapter includes a scorecard, developed by the GABV to assess the sustainability or impact of banks. Triodos Bank was the first bank in the world to publish its scorecard in this format in full last year. We believe this new initiative provides an opportunity to assess and communicate qualitative and quantitative evidence of a bank’s true performance beyond a narrow financial perspective.

We want to build on this and play a leading role in impact reporting by meeting and exceeding prevailing standards as well as co-creating and encouraging more meaningful assessments. For the first year we have put materiality – the issues that are most important to an institution’s stakeholders – at the heart of our reporting. These issues are highlighted in a materiality analysis below following structured discussions with our stakeholders.

For Triodos Bank, sustainability, and the conscious use of money that underpins it, is integral to everything we do. So Triodos Bank’s materiality analysis integrates sustainability and financial issues. It represents our overall view of what our stakeholders and the bank think are most important to our work, not just the elements that relate to sustainability. And it is an important step in developing a much better understanding of the topics that are most important to our stakeholders.