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How to assess the sustainable value of investments

Author: ICAEW Insights

Published: 04 May 2021

Triodos has been in the business of green banking for 40 years. Its UK CEO explains how it weighs up environmental and financial risk.

Triodos has been a green bank since its formation over 40 years ago. Its original mission remains in place: to improve people’s quality of life without damaging the natural environment. 

But sustainable finance itself is evolving. In the UK, Triodos used to be part of a niche group of financial institutions. Now, it’s a mid-sized bank with a presence in five countries. 

“The potential for green finance is enormous and incalculable,” says its UK CEO Bevis Watts. “This is potentially the greatest economic transition we'll ever make and a major business opportunity if we can get the finance sector to see it that way.”

The debate in the sector at the moment is one of shifting risk management in finance. Lending money to fossil fuel companies and other high-emission sectors is now seen as very high risk. Watts believes this doesn’t go far enough, and a conversation needs to be had about how banks are regulated in regard to the role they play in society. 

“How do we shift that to something that is entirely aligned to the sustainable development goals, and is performing a socially useful function? I'm not talking about doing away with free markets but allowing them to operate within boundaries. We're still allowing some banks to finance Amazon rainforest deforestation, we're still allowing banks to finance trawler fishing when we know we're destroying seagrass beds that absorb carbon and reduce biodiversity. There should be more red lines we put around that.” 

There is an appetite within the banking sector to become more sustainable. Many large banks are making net-zero pledges, but it requires some deep and holistic thinking, says Watts. For example, he’d like to see more transparency around green savings products. 

“Ultimately, we try to be a reference point for others,” he says. “We want to prove that sustainable banking can be done well in terms of the impact we have, that it has credibility. We publish every loan and investment that we make so people can really scrutinise what we’re doing.”

Triodos is trying to progress a different kind of banking model. It doesn’t borrow money from other banks or pay performance-related bonuses. Watts hopes that these practices will be picked up by the wider sector. Their process for investments is detailed and takes a case-by-case approach. 

In some sectors, Triodos works with accreditation bodies. For example, it works with the Soil Association and the Sustainable Restaurant Association to assess organic food and farming investments, It works with the Green Tourism Board and its accreditations for green tourism projects. “In both of those sectors, we also have schemes where we gear the interest rate to the level of accreditation. So if somebody moves from silver to gold standard, we will reduce the interest rate.”

In many other sectors, it's more complicated. The first question that Triodos advisers ask customers is: what can we do together? They look at every aspect of that business proposal to assess its environmental impact. It all has to add up to an overall positive for society and the environment.

“We've declined renewable energy projects because they've been sited on intensive poultry production operations,” Watts explains. “We care about beneficial ownership. Who is it we're really lending money to? Who will really benefit from that project? There's some depth to it.”

That’s not to say that the Triodos approach is completely uncompromising. Last year, for example, the bank financed a project to put electric vehicle charging stations into 400 Tesco supermarket sites. The company providing this, Pod Point, was working directly with Tesco and EDF, which made that holistic assessment more complicated, but Triodos decided to go ahead with the funding as it set such a good precedent. “We're excited because we think that's a model that could extend to electric vehicle charging infrastructure much more widely. That's a good example of where we've had to weigh everything up, you know and focus on what it is we're really trying to achieve. 

Triodos also financed the first all-electric intercity coach service between Edinburgh and Aberdeen for a company called Ember, which is a relatively small business. That’s an example where the impact of the project superseded more typical risk assessments. “Sometimes you're quite confident about what it is they're trying to do, but the risk appetite needs to be looked at. We've been doing this for a long time, but it involves a lot of internal discussions on some decisions.”

Money is a hugely powerful form of democracy, says Watts. Asset managers can influence the direction of businesses on behalf of their investors, for example. “If we want really widespread, diffuse change in society – the type of vehicles we drive, the type of properties we live in – the way to affect that is how people can finance those things. If it is cheaper to have a green mortgage or a green car loan, people will go for them. Imagine if the big banks were making those products available; then you will see real behavioural change.”

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