The three opportunities for Private Banks to shape positive change
Over the last two years, since the publication of the previous edition of the report “Sustainable Investing Capabilities of Private Banks”, an important realization has crept into the financial institutions: that finance yields the potential to shape direction for positive change. This is an important step, the next one is implementation. In this report, The Center for Sustainable Finance and Private Wealth (CSP) and PwC explain what action private banks are taking to be the stewards of a more sustainable world.
In this article, I discuss the three biggest opportunities that exist for banks to increase their sustainable investing capabilities.
Firstly, banks have announced impressive sustainability targets. What they need now is the follow through.
Once a private bank acknowledges their role to play in global sustainability, they usually begin by announcing bank wide commitments, such as net zero targets. This is a welcome and necessary first step. Concrete plans and processes are needed for an industry which has come under fierce greenwashing allegations, particularly in the first months of 2022. However, we found that many private banks were lacking a plan about how this could be reached:
“Banks performed well in establishing sustainability-related objectives but are still developing concrete strategic implementation plans and processes. Strategy review and progress tracking mechanisms are often lacking or insufficient,” p.15 of the “Sustainable Investing Capabilities for Private Banks”.
So far, banks have been tracking progress using KPI’s such as percentage of sustainable AuM growth or the number of sustainable investment solutions offered to clients. Although these are the most commonly used targets, the CSP found that other metrics such as linking sustainability KPIs to remuneration at the board and advisor level, strong internal risk frameworks with policies including mitigation actions when metrics were not met were what characterized strong frameworks for reaching targets.
Secondly, whether a PB considers ‘impact’ through private market impact funds or active ownership is a key differentiator between banks.
CSP sees an increasing number of banks are actively promoting private market impact funds to their clients. These fund companies that may not have received capital or would have a much higher cost of capital had such funds not existed. The most common impact theme is microfinance, but themes such as affordable housing, healthcare and renewable energy are catching up.
It is significant that these types of funds, typically associated with large ticket sizes, are now being made accessible to private clients. This is mostly through innovative structures such as feeder funds, which have minimum investments of around USD 150k.
In terms of active ownership, whether a bank considers a fund’s active ownership approach in its due diligence is another key indicator.
Thirdly, training staff, particularly client advisors, is a bottleneck to private banks appropriately aligning investment products with clients’ needs.
CSP trains Wealth Owners — i.e. Private bank clients — in impact investment. This work has shown us that in many cases, Private bank advisors are not trained in understanding their client’s sustainability preferences. Our analysis found that a low hanging fruit for banks is to: “develop intuitive tools and questionnaires for clients to elicit sustainable investing preferences and goals as a starting point for discussion with their advisor” , p.53 of the report.
Interestingly, banks themselves are highly confident that their training programs have been effective, with half of the banks surveyed stating that 80–100% of their advisors are qualified to advise clients on sustainable investing. To borrow from another discipline, this may be called ‘the illusion of explanatory depth’: a psychological effect where people tend to believe they understand a topic better than they actually do. CSP believes that the education of relationship managers is a bottleneck to a more economically, environmentally and socially responsible private banking sector.
As we consider these profound, structural, systemic shifts in the private wealth space, I invite you to read this report by the Center for Sustainable Finance and Private Wealth (CSP) at the University of Zurich and PwC Switzerland, for the benefit for private banks across the world, and our CSP wealth holder alumni base, constantly seeking to challenge the status quo in search for a healthier and more sustainable world.