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Impact, Risk and Return – an Integrated Business

These strategic focus areas will help us to build on the achievements of the past, and develop further positive, sustainable impact in the future. We will increasingly use impact, risk and return to understand and assess this progress and performance in a holistic way.

Traditionally banks have focused on risk and return, primarily to avoid negative outcomes, and to enable investors to understand the performance of a particular institution. Risk and return tend to be seen in a short-term context, particularly when an institution sees its main goal as maximising returns to shareholders. It’s a perspective that sees a company through the narrow lens of its financial performance only; and it neglects a company’s wider relationship with – and impact on – society and the environment.

So Triodos Bank uses impact, risk and return to understand its overall development and place in the world around it. This necessarily means it has a positive, long-term perspective. Because if you are focused on delivering sustainable social, environmental and cultural impact as well as risk and return – as Triodos Bank is – your horizon is inherently longer-term and has a positive, holistic outlook.

Impact

Triodos Bank wants to deliver sustainable impact. When we talk about ‘Impact’ we are concerned with what our actions, in particular financing and facilitating investments, mean concretely to people. Impact means delivering positive outcomes, not only on a transactional level but also on a social, ecological system level.

Increasingly many banks and businesses talk about sustainability and their efforts to make sustainable impact happen. This approach can be more limited in scope focusing, for instance, on reducing CO2 emissions or divesting from financing industries that use fossil fuels. These are laudable aims. Indeed Triodos Bank joined other financial institutions in The Netherlands to sign a Dutch Carbon Pledge during the COP21 conference in Paris in a commitment to experiment with annual carbon foot printing, disclosure and target setting for investments. But impact goes much further. We want to use finance as a catalyst to make new, sustainable ideas a reality in the real economy.

As well as delivering impact, we also want to understand and communicate our impact better. During 2015 this included providing more meaningful information about the qualitative impact of Triodos Bank’s finance, auditing the impact data we provide and developing a manual to provide co-workers with everything they need to know about our impact and how to implement our reporting. In our view while providing impact data is helpful, its role is in support of, not ahead of, qualitative evidence of impact. We took steps in 2015 to share how we approach impact with external audiences, and learn from the work others are doing. We intend to develop this further in the next three years in a shift from a focus purely on reporting impact to how we manage impact more effectively in the business itself. The latter is best understood through storytelling, as Triodos Bank tries to do in its impact chapter.

We also played an active role co-developing the Global Alliance for Banking on Values scorecard so stakeholders can better understand the sustainability of different banks. We once again published the scorecard in full in our annual report. Other GABV members banks have also agreed to publish their scorecards together, on a special website in 2016.

Risk

Because our starting point is to deliver greater impact over the long term, it is essential that we are financially resilient and that, as an outcome, we have consistently been focussing on a high quality loan portfolio. Triodos Bank’s modest risk appetite is an important building block towards this resilience.

Historically we have delivered a high quality loan book, which means relatively few borrowing customers were unable to repay the loans we made.

The banking industry, at least in its core functions, tends to reduce risk. However, some risk is required to deliver change and development. We have been asked by stakeholders to reconsider our risk approach to achieve more impact, and we will. However, it’s important to understand that increased impact does not necessarily mean greater risk and lower returns. In fact, because of impact’s inherently long-term perspective, increased impact in our view can mean lower risks and better returns over time.

Return

Triodos Bank has been able to deliver stable, fair returns over a sustained period. Nevertheless in 2015 Triodos Bank faced stiff competition from conventional banks with a growing interest in sustainability as a market opportunity. For this reason we experienced increasing competition for strong sustainable businesses looking for finance. In addition entrepreneurs continue to feel uncertain about the future, in terms of markets and government policy affecting their sectors and are reluctant to invest and to borrow money. And while interest rates continue to be extremely low, bank’s business models, including Triodos Bank’s, can be adversely affected; this is particularly true when liquidity surpluses need to be invested at negative interest rates. Despite this we were able to continue to grow our sustainable loan portfolio, by 13% in 2015. The total loan portfolio, including short term lending to municipalities, increased by 22%.

Triodos Bank has a balanced business overall which also benefits from a successful Impact Investment arm, Triodos Investment Management, whose assets under management grew by 19% in 2015.

A resilient institution with impact at its heart

Combining Impact with Risk and Return reflects Triodos Bank’s values based approach. It exists to benefit people, the environment and culture and is a business that integrates non-financial impact and financial performance. But, for Triodos Bank, financial performance is important because being a resilient financial institution is essential to delivering lasting, sustainable change.

Our stakeholders understand this, as the materiality analysis below shows. Maintaining a resilient bank is also reflected in the strategic objectives that follow. These objectives describe how we deliver positive impact and how we plan to in the future. They are also a reflection of the views of our stakeholders and Triodos Bank itself.

To maintain our position as a robust financial institution we maintained a strong capital position (CET1 ratio of 19%) and managed growth in lending, deposits and investments during the year. These collective efforts meant Triodos Bank’s total assets under management were EUR 12.3 billion by the year end.

Maintaining a healthy balance between lending and the strong influx of deposits, while continuing to diversify our loan portfolio, continues to be a challenge. Sustainable mortgages continued to grow and contribute to this effort. Our mortgages incentivise home-owners to live in more environ­mentally friendly properties. This part of the business grew by 52% during the year, helping to deliver a ratio between sustainable loans and deposits of 62%.

We are also required to fulfil increasing regulatory obligations. This meant we continued to put significant effort and resources into this work during the year, and benefited from strengthened risk management teams and more robust internal governance structures. Ultimately regulation should not limit our ability to engage with customers. Regulation should not undermine dialogue with customers when, for example, it becomes an exchange of protocols. We put effort into constructive conversations with regulators and the wider public in 2015 to make this case to help make sure regulation is both proportional for smaller and medium sized banks, and effective.