Following the news that Big Society Capital CEO Nick O’Donohoe is to step down by the end of the year, James Perry looks at O’Donohoe’s legacyRead More ›
Summer School: The Impact of Sustainable Banking
The author just came back from the Summer School of the Institute for Social Banking in The Netherlands, where he taught some lectures. Though Social Banks create a lot of positive impact on society and the environment, it still seems hard to measure the impact.
What is the impact of sustainable and social banking? How can it be measured and compared with other banks and financial institutions? Many of the participants of this summer school came from European social banks such as Triodos, GLS, Alternative Bank Switzerland, Banca Etica, Ekobanken, Merkur or La Nef. Banks with balance sheets with up to $7bn listed do great projects to foster sustainability, renewable energy and societal issues. But do they have a real impact, given that the sum of their loans and other products and services are minuscule, compared to their global competitors?
I think everybody agrees that they have.
Compared to Europe, it seems to me that North American impact investors and ‘social banks’ measure their impact in a more practical way. Some use the concept of Social Return on Investment (SROI), a method to measure social impact compared to financial input. The Toronto-based Social Capital Partners, for instance, uses this concept to show the social return of their investments.
Other banks work on demonstrating their impact as well. The Swiss Alternative Bank calculated the impact of their investments into renewable energy projects. Loans for renewable energy projects helped to produce energy with less CO2 emissions than conventional energy projects do. Because those loans were taken from a fixed income bond the bank calculated that $100,000 invested in this bond reduces CO2 emissions comparable to 1.5 person per year and offers a 1.5 per cent rate of return.
But how can this impact be calculated, given that in the case of banking and investing, the impact is indirect? Social banks and impact investors create their impact through projects and firms they are investing in. They do not impact our society directly, unlike for instance a NGO that takes care of the environment.
Based on the concept of SROI, banks are able to calculate even indirect impacts. The measurement consists of three main steps: assessing the financials, impact assessment and impact allocation:
What is the total project budget and what percentage is invested by the investor? Based on these questions, the percentage of the social finance investment can be calculated. Together with analyzing the duration of investment, this step is needed to allocate the impact in step three.
2) Impact Assessment
What type of project, or borrower, does the bank invest in and what impact does this project or borrower create? In the case of renewable energy projects, the energy production per year (or per given duration) should be assessed. For environmental projects, life cycle assessment databases may be used. The energy produced and the CO2 emissions connected with the energy production can be compared with a benchmark, i.e. the emissions of conventional energy production. The impact of social projects could be ‘workplaces created for those that have problems finding jobs’. There are some sources that calculate the benefits of such an investment as well. Examples can be seen on SROI reports that are, for instance, provided by Social Capital Partners.
Of course, not the total impact can be allocated to the investors. A significant part should be allocated to the project. Therefore, the percentage of capital provided by the investors on the total capital, multiplied with the impact, may be used. If the investor provided only half of the total investment capital, then only 50 percent of the impact can be allocated to the investor. In our case, this could be the CO2 emissions or CO2 emission reductions compared to a benchmark during the time of financing or per year.
Generally, I think that there are multiple methods to measure the impact of social finance. These methods should be shared more widely than has been done before. From my point of view, it would make a lot of sense if European and Canadian social banking organizations connect much more, in order to promote social finance.