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Financing Change. Changing Finance

Financing Change. Changing Finance

There are two key ways in which Triodos Bank positively influences the world; financing change and changing finance. This is more than just a phrase. It is at the heart of our work and it is what our stakeholders ask of us.

At Triodos Bank’s core, we finance change. By lending to, and investing in, sustainable enterprise we help create a better, more sustainable world. You can read about what this meant in practice in 2017, throughout this year’s report.

At the same time, we aim to change finance. We use our influence to change a financial system so that it puts people’s interests first while allowing us to live within our planetary limits. Because too often, our current system does neither.

We are part of the financial system. We do not sit outside, looking in. And that difference matters. It means that, as an integrated sustainable bank, we can speak credibly about what a more sustainable financial future, and the financial institutions in it, might look like.

But living this example, through the choices we make about who we finance, isn’t enough. We also need to challenge assumptions about the financial system, particularly those that promote and entrench the status quo. And we want to support and partner with others who have a similar view.

Financing change on multiple fronts

At the core of Triodos Bank’s work is a commitment to finance entrepreneurs leading sustainable businesses that improve people’s quality of life.

From financing enterprise designed to support refugee communities to renewable energy lending, we financed thousands of positive enterprises during the year. When making these loans, using our depositor’s savings to do it, we can both finance and change finance simultaneously. We both lend to agriculture projects directly and highlight the issue of stranded assets in land that’s no longer able to produce food because of excessive intensive farming, for example.

The key organisations serving the refugee community in Spain need liquidity to develop their programmes. Traditionally they have depended on public funds to finance their work. But their financial needs are often more urgent. Triodos Bank in Spain stepped in to meet this gap during the year. CEAR and ACCEM programmes include creating and maintaining human-centred reception and integration services; care for refugees with special needs and employment projects meeting labour demands and building social cohesion and networking opportunities in local communities.

In Germany Triodos Bank supported the energy transition by financing renewable energy production as well as grid and storage. It also launched a new savings account linking communities with local renewable energy projects.

We innovated during the year to deepen our impact in a fast-developing financial sector. When we innovate, we focus on more than technical innovation alone. Technology is not inherently positive if it’s not matched with social innovation. As we reported last year there is evidence that algorithms used in social media reinforce our bias rather than provide access to diverse opinion, for example. This can have unintended and negative consequences for a less informed society.

The development of a new app during the year exemplifies the balance we aim to strike. Launching first in the UK, the app deepens the relationship with our savers and increases the transparency of the impact of their money by connecting them with borrowers in their local area. The Netherlands launched the same product later in the year and the app will be developed further in Belgium in 2018. We also responded to long-standing demand from customers and successfully launched a personal current account in the UK. The account will substantially increase our reach and attracted considerable attention.

In Belgium the Bank launched the Triodos Impact Portfolio. This new service makes it easy for individuals to invest sustainably via a range of Triodos Bank’s investment funds. An investor’s risk appetite determines which of five investors ‘profiles’ is selected.

We also further developed our socially responsible investment fund offering. During 2017 we announced our intention to run the financial asset management of our funds that invest in stock listed companies within Triodos Bank. Previously we worked with external parties to do this. By integrating the sustainable and financial analysis within the investment process of these funds, we aim to increase our positive impact in socially responsible investing.

As well as savings, current accounts and investing, we also innovated around charitable giving. During the year the Triodos Foundation – Triodos Bank’s grant-giving arm – launched a crowdgiving platform in The Netherlands. The initiative enables the crowd to donate to important causes. The first beneficiary was the Female Cancer Foundation, successfully raising a target of EUR 50,000 from over 500 givers. In Spain, Triodos Foundation has launched 16 crowdfunding campaigns for educational organic gardens. Half have closed successfully during the year, raising more than EUR 15,000 from almost 500 donors.

LEAF Lab (Local Economy Alternative Finance) is a dedicated innovation team working for Triodos Bank in the Netherlands. Its experiments in 2017 included ‘Participating with Passion’, an initiative to connect sustainable start-ups with Triodos’ Private Banking customers. The first Private Banking client invested in a sustainable start-up during the year. The group also continued to develop finance for decentralised local renewable energy cooperatives. It is also co-developed a circular currency initiative, United Economy, during the year enabling sustainable entrepreneurs to trade with each other with sustainable money, or Uniteds.

Systemic strain

Almost 10 years since the financial crisis and, while superficially much seems to have improved, many underlying problems remain. In some ways quantitative easing – in which central banks inject massive amounts of money into the economy in the hope that banks will lend to more businesses – gives a false impression of health. All of this money keeps interest rates artificially low. Given the extent of quantitative easing since the financial crisis, rates are at historically low levels.

The result of that is low, no or even negative interest rates for savers across the sector. In The Netherlands, for example, this has led to negligible differences between the rates offered by most banks.

This situation is particularly challenging for a bank like Triodos which finances all its lending from savings. This way of working is part of being an integrated values-based bank that’s focused on financing the real economy; the part of the economy that is concerned with producing goods and services, as opposed to buying and selling on the financial markets. It reflects our mission and means we don’t have to borrow from other banks to lend. But it also means the money we don’t lend – and all banks need to keep a liquid buffer – can become an expense rather than income. This does not detract from our approach which has been, is and we believe will be, at the heart of our long-term financial health.

Despite these challenges, we see real change is coming. An increasingly powerful movement of actors in the financial sector are building the transition to a sustainable, new economy. We see it in coalitions such as the GABV, a network of independent values-based banks co-founded by Triodos Bank. And we see it in a multitude of businesses focused on creating a fairer, more equitable and sustainable society.

Changing Finance

We played an active part in this movement during 2017, acting at a European and global level to address systemic challenges. For example, Triodos Bank convened a group of leading thinkers from banks, academia, civil society and the voluntary sector to create grounded, actionable ideas to build a more sustainable European financial system.

‘New Pathways: building blocks for a sustainable finance future for Europe’ was launched under the auspices of the GABV, Finance Watch, a voluntary organisation dedicated to making finance work for the common good, and Mission2020, a global initiative designed to bring new urgency to the climate conversation. The report summarises powerful arguments for change. From major speaking events, such as the New Economy and Social Innovation Forum in Malaga, Spain, the report’s recommendations were shared across Triodos Bank’s network.

Among a plethora of ideas, the ‘New Pathways’ white paper makes several specific recommendations. It describes regulatory and political measures at the European level to accelerate and transform the role the financial sector can play in the transition to a carbon-neutral economy.

Specific recommendations include creating incentives for green investments and disincentives to investing in environmentally damaging assets for banks. Other practical proposals include changing regulations so that ‘ordinary people’ can invest far more easily in impact. Currently impact funds are largely restricted to the very wealthy.

Among others, the New Pathways report has been discussed directly with the European Commission’s High-Level Expert Group on Sustainable Finance, a body of experts established to examine “how to integrate sustainability considerations into its financial policy framework to mobilise finance for sustainable growth”. Our ability to positively influence these kinds of conversations could prove crucial in building a more sustainable financial system.

Accounting for change

And there were other, significant efforts to deliver long-term, scalable sustainable change during the year. December 2017 marked the two-year anniversary of the Paris Climate Summit. The signing of the Paris Accord in 2015 committed almost all the world to keep an increase in global temperature to safe levels. By most measures the summit was an extraordinary success. It seemed to show a credible pathway to transition to a low carbon economy.

Indeed, the transition has started. Enormous strides have been made in the energy sector. Some commentators even claim that the energy ‘problem’ is now solved. While there’s much to do, they argue, energy solutions are now all in place and increasingly affordable. This may be true, but there is still not enough urgency given to how quickly we need to ‘bend the carbon emissions curve’ downwards.

Two years on from Paris, and despite one high profile exit from the agreement, significant progress continues to be made. In The Netherlands, for example, a collaboration of financial institutions has created an open source methodology to account for the carbon footprint of loans and investments. Launched at a follow up climate conference in Paris in December, the Platform for Carbon Accounting Financials (PCAF) has co-created a new way to assess carbon emissions which will ultimately allow stakeholders to see what financial institutions’ investment decisions mean for keeping carbon emissions below 1.5 degrees centigrade from pre-industrial levels. Over 2 degrees is widely regarded as unsafe for our future. Triodos Bank expects to start implementing the new methodology during 2018 and will play an active role encouraging others to adopt it too.

Meeting the global, interconnected challenges we face will require business, government and civil society alike to step up. So, this kind of initiative matters. It shows the financial industry taking responsibility for its actions.

PCAF’s announcement followed a joint, open letter from several Chief Executive Officers of Dutch financial institutions earlier in the year. Initiated by Triodos Bank, the signatories promised to play their part in a low carbon economy and called on Government to do the same as a powerful and complementary force for good.

To change finance, requires this kind of thought leadership. It is exactly the kind of influence that our stakeholders want to see from us, as the materiality analysis that follows shows.

Privacy matters

As interest has grown in a more sustainable future for the financial industry, so has awareness about transparency. Triodos Bank has pioneered transparent banking, sharing details of the companies it finances, for example. But with greater transparency come challenges, particularly regarding privacy, an issue that was also highlighted by our stakeholders during the year.

This is an area that we explored in depth during 2017, including consultation with industry experts, ‘Bits of Freedom’, and others. We also discussed privacy with stakeholders in a discussion at the head office. In essence the group was positive about personal data and related information being used to help increase our impact. But negative if it’s to be used by third parties for their commercial benefit.

Our approach to privacy is anchored by our mission and informed by these conversations. We want to make sure our customers remain in control of their personal data and related information. And create ways for general data to be used in the service of the common good. This approach does, nevertheless, present some real dilemmas.

We intend to only ever use personal data and related information externally if it’s in the interests of our customers. We want to find ways to do that, that put people in control. We will develop this work further in 2018. We will publish a vision for how we see privacy issues, and use ongoing conversations with our stakeholders to sharpen our thinking and practice.

Unifying values in a divided world

Triodos Bank’s work does not, of course, take place in isolation. We work in regional, national and international contexts. And we operate in a world of increasing differentiation with Brexit, and events in Catalonia in 2017, as obvious examples.

We respect the opinion and interests of our stakeholders and take them into account in our work on the basis of a strong belief in unifying values. We spent time during the year listening to our stakeholders and their views are reflected in the material issues that we cover in our annual report. At the same time, we remain true to our values as an independent, European bank with a common social purpose that binds our activity wherever it takes place in the world.

Like all other European banks, we are part of an ongoing process of discussion with the regulators about the potential implications of Brexit. We want to continue to support sustainable banking in the UK and individuals who want to embrace a more conscious approach to banking and finance.

Goals for change

From climate change to inequality, our challenges are increasingly complex and interconnected. To understand them we need simple tools. The Sustainable Development Goals, launched in 2015 to succeed the Millennium Development Goals, provide this framework.

They can provide footholds for our thinking and action by describing the biggest problems we face and inviting linkages between them. They enable stakeholders to understand the international context for our work, and what it all adds up to, in relation to the big picture.

The SDGs provide a backdrop for important insights. They reflect the interconnected nature of the problems we face. And they show that we need new approaches to address them. In the past many people have relied on the free market to answer some of our hardest questions. It is our strong conviction that if this ever worked in the past, it won’t work in the future. We believe that the same people and institutions who contributed to some of our biggest challenges, including inequality and climate change, are highly unlikely to be able to solve them. New and integrated solutions are necessary.

The aggregation of marginal gains

The SDGs also imply that solutions are both local and global. We need to act ‘next door’ and far away. The climate is perhaps the most powerful example of an interconnected system. If we’re to avoid catastrophic climate change we’ll need to act in our immediate sphere of influence. Individual choices we make about what we buy (or don’t), how we reduce our energy use and where it comes from, for example, can add up to real change. But they are not enough on their own. By combining largescale projects with this aggregation of marginal gains we will be able to live within our planetary limits.

Frameworks like the SDGs support our mission, which preceded them. Some businesses use the SDGs to help integrate sustainability in their core business. But Triodos Bank has always had sustainability at its core; so their role is different. Instead they provide a useful additional lens to challenge the direction of travel we have chosen to take, identifying gaps and motivating co-workers, customers and broader stakeholders alike.

We have reported against the SDGs more extensively in this year’s report to build on our work in the 2016 report. We hope that it provides you with an insight into how Triodos Bank sees the world, our place in it, and how, with others, we are financing change to change finance.

In conclusion – Reflecting on the year and our prospects for the future

When assessing our results we aim to strike the right balance between measurable goals described in the strategic objectives that follow and an integrated, holistic view of our performance. Inspired by our essence, both our goals and how we try to deliver them result from structured reflection across the organisation. We listen to the priorities of our stakeholders to help determine where to focus our efforts. And we put our approach to finance for impact in a macro and national economic perspective.

We will continue to face challenges in 2018 and longer-term, including influential trends, such as digitilisation and major developments in the payments industry. Growth in the economy of around 2% in the European Community is anticipated in 2018, but with the slow phasing out of quantitative easing, low interest rates are likely to continue for some time, with a negative impact on Triodos Bank’s return. This low interest rate environment, competition for sustainable loans and meeting regulatory demands will continue to be areas of important attention in 2018.

We will also continue to meet the emerging challenges of a changing political environment. As we describe above like all other European banks, we are part of an ongoing process of discussion with the regulators about the potential implications of Brexit, for example.

At the same time, a combination of initiatives, such as gathering momentum behind the SDGs and the Paris Climate Summit in 2017, are likely to encourage further growth in sustainable investment. We expect there to be no significant changes in business activities and to continue to develop and maintain a healthy inter-relationship between impact, risk and return. We aim to deliver continuing growth and a stable return on equity.

Increasing the ratio of sustainable loans to funds entrusted has been an important focus for our efforts in recent years. We are pleased that during 2017 we moved this ratio back into a healthy balance. Both growing our business as usual while innovating, is one of our key challenges for the coming years. We made steps to innovate more during 2017 and intend to build on them further in 2018.

We can reflect on a year of stable, financial returns. We delivered a Return on Equity of 3.9%; controlled growth lead to an 8% increase in assets under management; and we maintained a strong risk capital position, with a common equity tier 1 ratio of 19.2%. Looking forward we aim to finance more impact. Our goal is to deliver stable returns, despite a challenging environment.

We face increasingly urgent global challenges and opportunities as a society. We are determined, with the continuing involvement of our stakeholders, that Triodos Bank plays a front-running role to meet them.

Zeist, 14 March 2018

Triodos Bank Executive Board
Peter Blom, Chair
Pierre Aeby
Jellie Banga