Kay Swinburne

Recognising the challenges that society faces, and realising the opportunity that banks and other financial institutions have to influence meaningful change in their capital allocation, could be one of the most defining themes for our industry this generation.

Integrating social impact into capital allocation is not new. The asset management industry is well versed at viewing investment opportunities through an environmental, social and governance (ESG) lens. Yet, across financial services, it appears that there is a lot more room for improvement.

In recent months, we surveyed financial services institutions from across the market, as part of the City of London Corporation’s Finance for Impact initiative, on their approach to scaling and measuring social factors in their activities. Nearly half (47%) of respondents said that most of their capital allocation activities were being done without social impact goals being considered.

We know that there is more scope in the banking industry to bring social impact in capital allocation in line with corporate activities. Encouragingly, there are banks that are taking a more holistic approach to closing the gap — identifying benefits of their corporate social responsibility and ESG work, and exploring how to leverage those ideas to influence their lending and finance operations.

But when social impact goals are not translated into capital allocation, financial institutions are missing out. There is a growing consensus, not least among the asset management industry, that social metrics are good proxies for well-governed companies and, by implication, more robust investments.

Mental health and the living wage are popular proxy factors being considered. It makes sense: happy and healthy people make better decisions and can tell us a lot about the type of leadership in place. I believe we’ll see leadership teams in banking increasingly recognise the positive impact that social impact factors like these will have on capital allocation decision-making.

Where to start?

Simply, measuring and capturing data is the first step to understanding the influence of social factors on your business and your clients’ performance.

It may appear passive, but even asking questions of clients can have a significant impact on behaviour. Asking questions about a client’s operations will capture important information for that bigger picture, but also ensure that social impact is part of the conversation when engaging with clients and focus minds on the values that they want to support.

even asking questions of clients can have a significant impact on behaviour.

If we take a leaf out of the asset management stakeholder model, we can see how that client relationship could evolve from passive to proactive engagement. Asset managers are expected to take positions and influence as part of their stewardship, which helps move the dial. As social impact becomes ever more central to capital allocation activity, we will likely see banks adopt some of that proactive style.

Some corners of the market may believe that legislation and regulation is the best way forward for directing the industry to take on social impact. Understandably, many leaders will find it simpler to justify investment and change by pointing to something that they ‘have to do’, rather than something that they ‘want to do’.

While legislation could have an extra-territorial impact and compel or encourage institutions to disclose information across their operations, it would take considerable time to develop and implement. And, even if there was some degree of global agreement on legislation, the enforcement of those laws would likely be quite different in each jurisdiction.

Instead, we should look to best practice as a concept that can help social impact transcend those boundaries and start making progress as soon as possible. If a financial institution has already aligned best practice with its values, why wouldn’t it follow through with social impact shaping its capital allocation activities, regardless of legislation? Fortunately, this idea is gaining traction among banking professionals.

An industry-led coalition

To drive through that responsibility, we’ll need to remove any concerns over being a ‘first mover’. As a collective, we can improve transparency and consistency with minimum standards. It requires market leaders to work together in a non-competitive manner with shared objectives and standards and encourage others to follow.

That’s why, as part of our recommendations in the City of London Corporation’s report, we’ve proposed bringing together an industry-led coalition — representatives from across the financial services to identify which metrics to focus on and how to carve that route forward.

Fundamentally, this isn’t about competitive advantage but the value to society to collaborate that can improve all standards. Amidst this discussion, we should all consider the challenging period that both corporate and retail customers will be going through. How the industry treats its most vulnerable customers will be incredibly important in the months and years ahead.

Kay Swinburne is vice-chair of financial services at KPMG UK

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