Can values-based banking reshape the financial system?

So why, even if we have all those advantages and being resilient, are the most value-based banks still small? Hey there, and welcome to Money for Change, the podcast where we discuss current developments and the role of money in creating a more balanced and just world. Of course, we want you to be part of this conversation. Head over to our website via the link in the show notes to share your thoughts or ask questions. Let's get started. Hi there, and thanks for tuning in to another episode of Money for Change. We hope you had a great summer. I definitely enjoyed my summer holidays, and now we're back at it with a lot of energy. My name is Emma DeLeo, and I am your host for today. We've got Hans Stechmann with me, as well as Martin Röner. And today's topic, we have the topic of values-based banks. While they're still a small piece of global finance, they're growing fast and their focus is on financing the real economy. So the key question today is, how can the values-based banking movement influence and inspire the broader financial sector to adopt more responsible and sustainable practices? And can they live up to their promises to create systemic change in the financial sector? - That's a very long sentence, Emma. - Yes, it is. And we've got a great guest with us today, Martin Röner, Executive Director of the Global Alliance for Banking on Values, or, how we're going to refer to it, GABV. And we have Hans Stechmann, Chief Economist at Triadl's Bank, one of the founding GABV banks. - Welcome, both of you. - Thank you. So today's key question on the Money for Change podcast, can values-based banking reshape the financial system? - Let's simplify the question a little bit. - That's a simpler question than you had before. Exactly, exactly. All right, so we'll set the scene a little. The GABV was founded in 2009 by 10 pioneering banks, including Triadl's Bank. It's now grown into a movement of around 70 financial institutions across 45 countries. For listeners that may not know the difference, what does it mean to be a values-based bank? That is a question for you, Martin. I think values-based banks, they use their financial work to change the world. They want to really change the world. They put people on planet at the heart of their business model. They're really grounded in the real economy. They want to be transformational. They're very intentional about what they do. I think that's what sets them apart from other banks that might also be doing good things, but maybe not with the same intentionality and not with the same coherence. They might be doing different things at the same time. Good things, bad things, you know, financing renewable energy, for example, and financing fossil fuels at the same time. Whereas values-based banks really very deliberately try to achieve an impact and produce the change we want to see in the world. Maybe a question. What's the difference between values-based and ethical? Is there a difference or is it the same? I don't think there's really a difference. I think that's a very good point, Hans. When we assess members for our membership, what we look at is how do these banks reflect on the ethical issues? So what are the guiding values? They might be very different. Values are very contextual. So you go to Bangladesh and it might be about poverty reduction. You come to the Netherlands and it's maybe more about climate change and mitigating climate change. What we look for is what's the attitude? And that's why culture is also a very important element in these organizations. What's the attitude not just of the senior management, but the entire organization? How do they respond to these questions in the everyday business? And you also mentioned they finance the real economy. Can you tell our listeners kind of what that means? Yeah. So what we mean when we look at the real economy is that they finance brick and mortar projects. They finance entrepreneurs. They finance everyday activities, housing, agriculture. They're not the kind of banks that are primarily dealing in the capital markets and just pushing money here and there, but that are really trying to be productive. And do you still use the scorecard methods to see if the banks that want to become a member are doing that to the right extent? Exactly. So I only know by heart that it was a certain method, but it is for me years ago. It has evolved and it's become a very powerful tool because we now are able to produce a dashboard where we really have a profile of the bank where we look at both quantitative factors and qualitative elements, so hard data such as, for example, the composition of the portfolio, the lending portfolio, the investment portfolio, but also soft factors such as strategy, governance, human resource policies, etc. So there is a way of measuring this. We always like that with this podcast, a little methodology right at the beginning. I think this sounds wonderful. I mean, I work at a GABV bank, so I'm already convinced. Do you think mainstream banks are starting to take some of these ideas seriously? I do. And I say that really because we are increasingly being solicited by also mainstream banks, sometimes smaller banks, sometimes also larger banks for very different reasons. I think some of them feel a certain discomfort because they know that the mainstream concepts of sustainable finance are not delivering on the impact we want to see in the world. And so they simply want information. They want to understand biospace banking better. We've had other banks that have approached us in connection with their leadership development that want to have a contribution to their leadership development plan. And then we have some banks that have been contacting us because they have very concrete advisory needs where we are connecting them with leaders from our movement or maybe previous leaders from our movement to help them work through those issues that they're looking at at the moment. But yeah, I see that I also noted, but in the end, it's not rocket science, right? For those bigger banks. It's about values. So what are they looking for when they contact you? Is it so how do you do that and what's your business model and maybe we can expand our business model to have a new market because our clients want it? Or is it more in the core of how they operate? I think they, I mean, you know this, Hans. When we're talking about sustainable finance and ESG, I feel like there's a lot of technocratic speech. There's piles and piles of reports that are being produced and just as you were saying, it's not rocket science. It really goes really more back to the essentials. What's the purpose of the institutions? What do they want to achieve? What are the challenges they see in the society or in maybe the environmental challenges that they want to resolve with their banking model? And I think what they are intrigued about is that our members have been able to make this work and still actually be profitable. They're not profitable despite being vice based, but because they are values based, they are financially resilient and successful. And so they want to better understand how that works. Now, you're absolutely correct. We always try to find out why are, what's their motivation? Why are they contacting us? And I think sometimes there's really some absolutely justifiable reasons because I think they are realizing that they, as being large banks, have the clout that they can change something in their marketplace where they're operating, that they could have a bigger impact and they're struggling how they can get there. And they're looking towards some of our members because they see that banks like Triotus, for example, have been very successful in having that kind of impact. You mentioned it already. It's not just morally appealing, but also financially viable. And you've seen that across a lot of different sectors and a lot of different countries across the banks. What about resilience? What about when the markets go down? How is the values based banking? How does that react differently? Are they more resilient because they're tied to real economy or less fluctuating markets? Exactly. So when we look at the bottom line, the financial bottom line of our members, what we look for is not their profitability per se, but the financial resilience. Our members might not be the most profitable banks, but what we have been able to see over time is that when crisis hits, we saw that during the financial crisis, we saw it again during Corona, our members outperformed the global systemic international financial institutions. They are less dependent on what the markets do because just as you were saying, they're grounded in the real economy. They don't have speculative business models. And frankly, I think the clients that they serve and the communities they serve, they're usually very loyal. They feel very bound by these institutions. So it's a give and take. So when things are going well and the client needs support from financial institutions, values based banks are there for them. But when the financial institutions is in a challenging situation, the client typically also is loyal and pays back the loan. So I think that's what makes this relationship so strong. Yeah, it's really more community based and you're part of a system, a wider system, providing certain goods. It may be also to ask that little bit uncomfortable question. Yes, I like to work at a values based bank, but we're not the biggest bank. And we know banking is more and more a game of scale. So you need scale. And why, even if we have all those advantages and being resilient, are the most values based banks still small or relatively small, also in the Netherlands if you look at Trials Bank and the others, then we are one of the smaller banks. Do you have an explanation for that? Why this is still the case? Why are we not the biggest bank in the Netherlands, for example? I think there's different reasons for that. I think values based banks don't want to grow per se to begin with, right? So it's inherent to their business model that it's going to grow organically. Secondly, let's face it, 30 years ago, they were challenger banks. They were born because there was an unease with where banking was heading and there needed to be a different business model. And so they started small. A colleague of mine just sent me a member assessment of a new member that started with a capital of 34 US dollars, and today has one billion US dollars. Wow. It's a credit union in Asia, and it's fascinating, right? So you have to look at the historical trajectory. Having said that, I still think it's very impressive to see where banks like Triodos, for example, or Lake Van City, or where Lake Labaral Kutchat today are. I wouldn't call them small banks anymore, I would call them mid-sized banks. And I think if you look at the visibility and the profile and the cloud they have in the market and the ability to bring their voice to the table, then I think you are at a point where the large banks are. And I think it has to do with the credibility that you bring with a value space business model because that just makes people listen certainly more attentively than maybe to a mainstream bank. You're more transparent in what you stand for, perhaps. I think credible especially also. So I think your word has a lot of weight in the market. Can Hanso be the answer to your own question of scalability in values-based banks? Partly the same. Partly the challenge is if you only want to finance the real economy and really understand what you do, it's not what every bank is doing. And so it's also a different part of the economy that you want to finance. You don't want to finance the whole economy as a value-based bank because part of it is unsustainable. And that was also what Martin started with. It's not that you have the ambition to become the biggest bank. And part of this balance sheet of those mainstream banks are not contributing to anything useful in the real economy. So that would also be an answer. And of course then you have, because your smaller and efficiency scale is intertwined, it also means that most of the time you're not the cheapest bank, let's be honest. And that's also not your purpose, and that's not what you want to be, but that's an effect of our market's work. That's also a reason, I think. We have to be honest about it. And can I just add one more point, we're looking maybe more at the European market where you have saturated markets, where the price can play a role in terms of growth, and of course also you need gross capital, and some of our members, they could grow more quickly and don't have the capital. But look at the emerging markets. The host of our last annual meeting, Centenary Bank in Uganda, is the largest bank in terms of customers and the second largest in terms of assets in its market. Interesting. Look at BlackBank. Just a couple of years back, it was the number five in the market already. It was a startup bank 25 years ago, then it was number five. Now it's the biggest bank in Bangladesh. What happened? Interesting. It was a revolution, and a lot of the mainstream banks in Bangladesh, they were affiliated and tied to the former regime. There was a flight to safety. Where does the money go? To the value space bank. Now BlackBank is the largest player in the market. So just going back to your argument, actually some of our banks, they are very important in system development. Very good that you correct me. I always have that Western European bias in my head, when I discuss this kind of thing. But I think that's, can you all still, 17 members now of the GDB? We have 71 members and expecting a couple more quite soon. So I know it's all over the world, but is it mostly growing in emerging markets the last few years? It's quite balanced, and I think that's what we're very proud about. So you have about 21 member banks in Europe, about 18 in North America. We just added two more in Africa, where we're only seven. That's our smallest chapter. Asia Pacific has about 15 banks, Latin America about 11 banks. So it's really very diverse. And we have members all the way from Canada to Papua New Guinea. And I think that gives you the idea of the diversity. Really cool. Of the membership. Great. I'm going to shift it a little bit because I've already kind of heard it from Hans. We're going to shift a little bit to an idea that's often linked to sustainability. And Hans definitely does this quite often is degrowth. So degrowth is the notion that economies in the global North, they need to prioritize well-being and ecological balance over constant GDP expansion. Hans, from your perspective as an economist, I think I might already know the answer. But is value-space banking compatible with the shift away from growth at all costs? I think you know the answer. But maybe it's also good to tell why we have that discussion also and that for some people confrontational discussion on GDP growth, yes or no, because I think for me it's about system change. It's about the transformation of the system. And one of the icons of the current system is of God, GDP growth and our system is dependent on growth. And so that's why we need to discuss it. But that's not to say that I'm against progress. That's not even to say that I'm against growth, which seems like contradictory. But what we do as value-space banks and what also traders bankers do, yes, we finance a part of the economy that definitely needs to grow. Most sustainable activities, so at traders bank we have five transitions, but whatever it is and however you call it, it's about the energy, it's about food, it's about resources, it's about well-being and social. So it's about increasing renewable energy that can grow, but decreasing the fossil fuel energy. Yes, it's about increasing sustainable agriculture and decreasing, for instance, it's all the same. And while we are as value-based bank financing that part from our origins, because that's what we do, yes, and part of the rest needs to be phased out. So I'm still a macroeconomist, a macroeconomic, this might lead to less economic activity, but the economic activity that is there should really change from being unsustainable to sustainable. So it's the most optimistic story you can tell, the story about degrowth, because that's the system that we want to have, and that's where value-based banks are part of. This is my interpretation, Martin has another interpretation. Look I think it's in the nature of human beings that they want to be productive, that they want to grow, they themselves grow, so I think that's just part of it. It's more a question of semantics. I think I was thinking about that question when you brought it to me Emma, and I think when we're talking about growth, you said economic growth, then it's the kind of growth that you can measure in money, right, in financial units. And what we really need is that all the costs and all the revenues are actually measured correctly and that externalities that are today not visible or not felt are internalized, and I think when that happens, then we can have positive growth in that sense because suddenly economic, also the positive economic growth can be measured. So for example, a cultural activity that is having a positive impact on society suddenly gets a financial benefit attributed to it, for example, right? So I think that's where the real challenge is. Now I think value space, banks definitely, like you said, I think they're truly transformational. They try to help that transformation both actively and passively in the sense that they don't finance harmful activities and focus on the positive activities, but actively also that they develop transformational business models and financing models that can accelerate that change we need to see. So if we were to dream, if all mainstream banks were to adopt the principles of value space banking, how would it look different? Would it be a lot more diverse, the financial system? Is that what I can gather from? I think it would probably be more diverse. I think you will probably see that the mainstream banks would maybe be slightly smaller because some of the activities they're doing are simply obsolete because they frankly don't really add much value, at least not to the normal being on the street because it's more about optimizing wells maybe for a few. And I think those that the mainstream banks that really would truly embrace the principles of value space banking, they would undergo a massive strategic and cultural transformation that is possible. I believe it, I'm absolutely convinced it is even for a mainstream bank possible, but it wouldn't be easy and the reason it wouldn't be easy is among other because they are listed on the stock exchange and they would have to develop a very different risk return profile than what they have today and they would have to do that very carefully and calibrate their communication with their shareholders in a very careful manner to explain that transformation. I agree it would be a challenge, but at the end points, banking would be simpler, I think. So a lot of complicated products, making money with modern derivatives and not all derivatives are bad, but some of them, so it would transform banking in the sense that we understand better what we do with money because it's about real economy, so we want to understand where money goes, where money comes from, and I think that's the essence also of one of the essences of value space banking that you understand where your money goes as one of our slogans also is. A very simple concept that is surprising and complicated. Yes, so yes, the transition will be very complicated, even impossible maybe, but banking, and that's why I agree that it must be a smaller sector because it's simpler, it's easier to understand. It's more transparent. You mentioned, and that I think is an important element of value space banking, you mentioned transparency. Transparency is important because it's the element of accountability of value space banks. Value space banks, they want to show depositors and shareholders where their money is going, what it has been used for, and that kind of accountability already kind of limits the kind of things that a bank can do, right, because you will very quickly run into reputation risks if you don't watch where you're putting that money to use. Is it also why regulation on transparency in Europe, this is my European perspective, is not going in the direction that we want it to be? So when we go back ten years, the idea is new regulation on the financial sector to show and to be transparent about where money goes in general. This ended up in only showing on the sustainability part where money is going and now we see a backtrack on everything. But we would then, if we believe that clients are sensible people and I think they are, and if they see that their money actually destroys a lot, that they value, would that be the biggest game changer in finance and that we in the end create values where that values based banks is not, maybe not the right word because people have values and if clients see what is done with their money, is that living up to their values? It will be the easiest regulatory policy and it will be completely unconscious, who can be against more transparency, right? And it should be simple transparency, it shouldn't be producing another 300 page report, it should simply be showing where the money goes, not more, not less, and that would be a game changer I agree with you. Yeah, it's definitely, I like the question though and it's definitely transparency is the first step, but it's really, you know, the individual client probably won't hold a big bank or big financial institution accountable, it's all about also identifying those stakeholders in the financial system to be able to raise their voices and their networks to also make these financial institutions or even corporations accountable for what they're reporting. That kind of leads to my last question, so if we were to meet again in 10 years, what do you think the GABV will have achieved in reshaping the financial system and through what levers, what approaches are you taking in the next 10 years to spread the movement and to grow? I would like to see that value-based banking is seen as the gold standard in terms of where the financial industry should be going, should be heading. My dream would be that in the next edition of the Sustainable Development Goals, value-based banking is recognized as just that, right? And what we're doing right now I think is we're obviously, we're raising the visibility for value-based banking in general, specifically for our movement, but on top of that, we want to have an impact beyond just our membership. I think today we have the scale that we are credible, we have, like you said, over 70 years, we're present on all the continents, together our members account for about 265 billion US dollars in total assets, we serve more than 50 million people, that's sizable, but it's still a drop in the ocean, but it gives us the credibility from where we can then operate and demonstrate that value-based banking brings better results for society and for the planet, and we're engaging first through our members at the national level, the local level, with regulators and policy makers. Trudeau-Dusbank is a great example for that, but at the global level we're also moving forward in a more coordinated fashion and making sure we can learn from each other and have an impact, let's say, at the level of European Union or at the level of UNEPFI. So I think what I am seeing when I go to these international meetings, and I don't think that was the case maybe three or four years back, that when I speak about ice-based banking and the global alliance, people already recognize us today, but I want to make it clear that this is something that is relevant for mainstream banks and not just for our members. May I add something? Of course. I think in the coming 10 years, so there is a lot going on in finance if we look at digitalization of finance, but also the globalization of financial streams. I think various banks should be the answer in the coming 10 years to make money the social relationship that it is, to make it human and to make it a force for change in society. And that's so opposite to what we currently see if you talk about Bitcoin with stable coins or the digitization of money streams anonymously. And that's where we should be, that we should show that there is an alternative model that is close to people that invest in real economic needs for people and the planet. And that's my dream for the coming 10 years, that we have an alternative. Well, thank you for that. I think that's very inspirational, and I hope you both predict the future in this podcast. We do have one last closing question. If you had 10 billion euros to change the world, how would you use it? 10 billion euros. Is that a lot nowadays, or is it a little, it's hard to say? Only people from the financial system and sector ask that question with 10 billion euros. That's a lot to say. What I would do, I would use it in two ways. First of all, I would use it to capitalize value-space banks, because in doing so, you can leverage it nearly 10 times, so you have an even much bigger impact than just 10 billion. And then because value-space banks are a great investment, you get a nice return, I would use that return to help scale up and pilot and grow transformational business models of these value-space banks, because there are certain market failures that prevent customers maybe making certain investments, which in principle would pay off, but maybe not today, but only in a period of 25 years or else, and I think that's what we could do with that money. Great. Very banker answer, I think, but it's a really good one. Alright, Martin and Hans, thank you for joining Money for Change this week, and the listeners out there, thank you for listening. If you enjoyed this episode, please subscribe and share, and have a great week. That's a wrap for this episode of Money for Change. We hope you found today's conversation insightful and inspiring as we continue to explore the transitions that are shaping our world and our future. If you enjoyed what you heard, don't forget to hit the subscribe button, so you never miss an episode. Thanks for tuning in to Money for Change.