1. Socially Responsible Investment and Sustainable Banking
Principles for reorienting a regional/local bank’s business towards sustainability
Tobias Hörnlein, IIIEE, Lund University, IIIEE Theses 2015:34, Executive summary
Within the last years, the globalized world has seen a multitude of major economic emergencies such
as the Dotcom bubble (2000) and the Global Financial Crisis (GFC) (2008). It appears to many an
observer that a systematic re-evaluation of the economic system and its motivations is overdue. At
the same time, the global social and environmental problems are increasing with human-caused
climate change representing the most pressing environmental matter. The multidimensional
problems must be approached with an equally diversified approach and financing is one of the lines
of attack. The International Energy Agency (IEA) estimates a required investment of between US$ 48
and 53 trillion until the year 2035 in order to reach the stipulated 2°C cap in the global warming
trend. Presently, institutional investors, such as pension funds, insurance companies, and mutual
funds, hold a combined value of over US $ 70 trillion in the OECD countries alone. The key role of the
finance industry is explicitly mentioned by the IEA as it enables the redistribution of private and
institutional investments. Economic growth and financial sector development are integrally
connected and the greening of this industry emerged as a trend in the last decades. There are two
expressions of sustainable finance, which are both addressed in this study: Firstly, Socially
Responsible Investment (SRI) in businesses that integrate environmental, social and corporate
governance factors (ESG) with classic risk and return indicators results in support for triple-bottom-
line companies. Secondly, sustainable banking encompasses the wider social and governance
corollaries of banking activities; the bank as a local mediator and catalyst for development has
effects on its community through lending and investment practices which are expressed in
sustainable banking products. This thesis is written in collaboration with Sparbanken Syd, which aims
to reorient its business towards a sustainability-focussed bank (SFB). The questions, accordingly, are
centred on how to enable a transition to a SFB and which internal and external factors play a role in
limiting or furthering this transition. Corporate Social Responsibility (CSR) provides the theoretical
background for this layout to bridge the connection from international SRI to the local business
scenario. Building on theories and empirical studies that support the positive correlation between
corporate social performance and financial performance, this thesis contains research on
international SRI principles and investment methods. Subsequently, a number of case studies on
small- and medium-sized SFBs are investigated to delineate to which extent and in which way the
international principles and methods of SRI are filtering down to daily banking realities. In detail, the
variables looked at are innovative products, describing the level of innovation, lending
standards including loans and project finance standards, investment screening building on SRI
techniques, as well as factors valuable to or impeding success. These encompass dynamics, such as
external pressure from governmental regulation or societal trends, as well as internal strengths and
weaknesses in regards to the workforce, managerial leadership or structural particularities of the
banks. Lastly, the aspects & impacts variable collects the mechanisms of creation of added value and
the transfer of added value as a public good. This level of abstract examination provides another
vantage point of reasoning for or against integrating CSR efforts. In regards to the international SRI
scene, this study finds a large number of principles such as transparency, credibility, comparable
reporting and pro-active risk management to be prevalent in the stipulations by large financial
institutions. These stipulations are expressed through various frameworks and organisations for
sustainable finance, such as the United Nations-supported Principles for Responsible Investment

2. Initiative (UNPRI), the Equator Principles (EPs), the International Finance Corporation (IFC)
sustainability performance standards, or the United Nations Environmental Program Finance
Initiative (UNEP-FI).
Furthermore, the business world supplies concrete examples of how to screen investment for
improper conduct as well as the integration of ESG factors, contributing to the creation of
competitive advantages and good market performance. Screening processes are intricate systems of
evaluation and engagement and if correctly applied can provide a green portfolio (e.g. green funds,
microcredits, project financing) with the needed credibility. Collaboration within the SRI scene as well
as the creation of business tools supporting for example SFBs are two major drivers for the successful
real-world adaption of sustainable financing processes. Two major drivers for this business concept
originate from the customer side: customers appear to be a longing for security and dependability,
coupled with a (more or less profound) wish to contribute to the greater good. Both are provided by
SRI screened products as well as sustainable banking activities. The findings regarding sustainable
banking activities are complex: In addition to the decisive international factors filtering down to the
local decision-making and business planning level, banking-specific realities, such as regulatory
pressures, local market and customer interest, internal capacity and willingness to change, and
market fluctuations play decisive roles in the process. Overall, there is a growing market for
sustainable banking that appears to be infused by international SRI principles of stability, integrity,
and long-term reliance on a bank. SFBs in their functions as financial consultant (lending and credit
planning), project-explorer (exclusion and engagement), and institution of public interest (norm-
setting through products) have the potential to produce public value unrelated to direct financial
payoffs but justified by the added immaterial value gained by the bank. The increasing legalisation of
ESG standards and adoption within decision-making frameworks, particularly within large scale FIs
filter down to the interconnected smaller banks and other financial intermediaries. They in turn
influence their local communities with their products and services. This finds concrete expression in
the development of business tools (GABV), interest associations (UNPRI clearinghouse, FEBEA,
EUROSIF), the overall speedy growth and large potential for SFBs, and in the market itself
(sustainable indexes, growth rates of ESG-screened investments). The majority of sustainable
banking products are comparable in return and mechanism to regular loans and credits, differing
mostly in the ethical framing structures (exclusion lists, positive choosing of best-in-class). They are,
however, secured through reciprocal savings rather than speculative transactions by the bank to add
to overall sustainable, stable development. A low interest rate can level the playing field for low-cost
differentiation and rob such products of their market advantage and appeal to customer. Equally,
legislative pressures force small banks to redirect scarce resources in order to be able to comply.
Therefore, the choices of where to start with a business transition, whom to involve, and what not to
attempt need to be based on a sound and thoroughly delineated business strategy. Public good
provision in the context of sustainable banking has three aspects: it is a side-effect of the bank’s
norms and expertise flowing into the business transactions. Secondly, public goods are also a target
for any sustainably-oriented entity, as they are the expression of the triple-bottom-line in the form of
social and environmental pay-offs. Thirdly, they become an extra motivator - beyond the competitive
advantage - for the development and offer of sustainable products. Credibility forms an essential
part of integrity, which is sought after by customers in SFBs. If ESG values are not an integral part of
the bank’s business DNA, a main pillar of decision-making, and championed by top management,
integrity is compromised. The competitive advantage is at risk due to reputational backlash caused
by external attentiveness and the effect on sustainable development is diminished. It might even be
reversed if trust in one bank is lost, the general believe in SFBs might falter.