Principles for responsible banking and sustainable development goals: an empirical investigation on European wholesale and retail banks

ABSTRACT

This article undertakes an empirical analysis of the role that principles of responsible banking (PRB) plays in the progress towards sustainable development goals (SDGs) in the case of Europe. Results suggest that in countries where the share of wholesale banks that are signatories to PRB is higher, progress towards SDGs is at a more advanced stage. However, the same is not the case for retail banks. This can be attributed to the crucial role that corporate and investment banking plays in financing large-scale projects that support the SDGs, such as renewable energy and sustainable agriculture, as opposed to retail banks that typically have a more limited capacity to finance sustainability-linked projects.

KEYWORDS:

• Sustainable development goals
• responsible banking
• SDGs
• green finance

JEL CLASSIFICATION:

• C33
• E43
• G21
• O33

I. Introduction

The 2030 Agenda for Sustainable Development requires countries to achieve the sustainable development goals (SDGs) set by the United Nations (UN) in a 15-year period. In the realization of the Agenda, banking sector is expected to play a strategic role (Hepp, Somerville, and Borisch 2019). In particular, by setting principles for responsible banking (PRB), UN Environment Programme – Finance Initiative (UNEP FI) is expected to facilitate the global progress towards the SDGs. Requiring banks to align their business strategies with the SDGs, the PRB is expected to accelerate their contribution to achieving the SDGs within the set timeframe (Stauropoulou et al. 2022). By leveraging the UN’s role, UNEP FI has already encouraged over 300 banks representing around 45% of the global banking industry to become signatories UNEP FI (2022a, 2022b).

Progress towards the SDGs and PRB has been uneven across the world with Europe emerging as a leading bloc on both fronts. European banks currently comprise 50% of UNEP FI membership and they constitute a very diverse jurisdiction in terms of sustainability integration. At the same time, the SDGs have been at the heart of European policy-making for around a decade, with the SDGs firmly anchored in the European treaties, particularly with the European Green Deal (Schunz and Schunz 2022). This makes Europe a unique case for exploring the impact of PRB adoption on the progress towards the SDGs.

II. Data description and methodology

Dependent variable, which captures countries’ progress towards achieving the SDGs, is drawn from the cross-country performance rankings (formerly the SDG Index) presented in the 2022 Sustainable Development Report authored by Sachs et al. (2022). The variable shows the overall score with respect to each country’s progress towards achieving all of the 17 SDGs, and can be interpreted as a percentage of SDG achievement. The data set covers 46 European countries for which banking sector data was available at TheBanks.eu website. The general model, which includes all variables, is specified as follows:

$\begin{array}{r}SDGsi={\beta }_0+{\beta }_{1}PRBsignator{y}_i+{\beta }_{2}Corruptionandbriber{y}_i\text{break}+{\beta }_{3}Investmentfreedomi+{\beta }_{4}Publicaccountabilit{y}_i\text{break}+{\beta }_{5}Fiscalpolicyeffectivenes{s}_i+{\beta }_{5}Economicgrowt{h}_i+{\epsilon }_i\end{array}$

where ε_i is the error term and i refers to country.

Following UNEP FI’s approach to firm classification (see UNEP FI 2019), two separate independent variables are used to represent PRB signatory banks in each country, namely (1) PRB signatory banks as a percentage of total retail (consumer and business) banks, and (2) as a percentage of wholesale (corporate and investment) banks. The relevant data was drawn from the UNEP FI’s PRB signatory bank list and TheBanks.eu websites. The remaining explanatory variables comprise composite indicators produced by the Heritage Foundation, with the exception of public accountability variable which is a composite indicators obtained from the Basel Institute on Governance. Data were drawn for 2020 and include:

• Corruption and bribery, which measures perceptions of corruption, bribery and control of corruption. It is drawn from various sources including Transparency International, Corruption Perceptions Index and World Bank’s Worldwide Governance Indicators.

• Investment freedom, which measures the market participants’ ability to move their resources into and out of specific investment activities, both internally and across borders. It is drawn from various sources including Economist Intelligence Unit, Organization for Economic Co-operation and Development and official government publications of each country.

• Public accountability, which is a composite measure aggregated based on the International Budget Partnership’s Open Budget Index, the International IDEA Political Finance Database and the World Bank’s IDA Resource Allocation Index.

• Fiscal policy effectiveness, which captures fiscal deficit and public debt management. It is drawn from various sources such as Economist Intelligence Unit, International Monetary Fund and World Economic Outlook database.

• Economic growth, which comprises GDP five-year average annual growth rate measured using data from 2016 through 2020 based on real GDP growth rates. It is drawn from several sources including International Monetary Fund, World Economic Outlook database and Economist Intelligence Unit.

Corruption and bribery are expected to have a negative impact on SDGs because they undermine sustainable development by distorting markets for goods and services. The rest of the variables are expected to have positive coefficients. Fiscal policy effectiveness is essential in delivering on the SDG’s promise to reduce economic inequality through progressive taxation and effective enforcement. Ineffective fiscal policies rig the system in favour of the wealthy, creating inequalities (Halkos and Gkampoura 2021). Investment freedom is relevant because it is not possible to address SDG challenges without financing from investors (Hendriks 2017). Economic growth is relevant because it is a necessary but not sufficient condition for sustainable development, even though it is not an ideal proxy for economic development. Public accountability is relevant due to the critical role the public institutions play in implementation of SDGs (Lauwo, Azure, and Hopper 2022.

Outliers were identified and removed based on Grubbs’ test for outliers (Grubbs 1969). Descriptive statistics of all variables are provided in Table 1. The pairwise correlation matrix gives a general idea of the bivariate association of the above explanatory variables and progress towards SDGs, where corruption and bribery, investment freedom and responsible banking have the strongest correlations (Table 2).

Table 1. Descriptive statistics.

Variable	Outliers removed	Mean	Std. Dev.	Min	Max
Progress towards SDGs	0	79.341	3.307	73.35	86.51
Corruption and bribery	0	3.53	1.58	0.6	6.1
Fiscal policy effectiveness	0	72.068	22.866	11.9	98.7
Investment freedom	1	76.029	8.771	55	95
Public accountability	1	2.59	1.779	0	6
Economic growth	1	1.362	1.226	−0.9	3.3
PRB (wholesale)	2	0.049	0.087	0	0.5
PRB (retail)	1	0.088	0.123	0	0.667

Table 2. Pairwise correlations.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
(1) Progress towards SDGs	1.000
(2) Corruption and bribery	−0.673*	1.000
(3) Fiscal policy effectiveness	0.083	−0.195	1.000
(4) Investment freedom	0.440*	−0.677*	0.025	1.000
(5) Public accountability	0.454*	−0.035	0.027	0.024	1.000
(6) Economic growth	−0.383*	0.346*	0.391*	−0.126	0.074	1.000
(7) PRB (wholesale)	0.540*	−0.174	−0.322	0.210	−0.003	−0.381*	1.000
(8) PRB (retail)	0.516*	−0.347*	0.040	0.378*	0.299	−0.316	0.385*	1.000

***p < 0.01, **p < 0.05, *p < 0.1.

III. Results

Table 3 shows the results of Model 1 and Model 5, which represent the general specifications with PRB (wholesale) and PRB (retail), respectively, among dependent variables. Following Alnasaa et al. (2022), variables were removed from the general model sequentially if they had little explanatory power based on the standard F-tests or the included variables showed a high degree of multicollinearity based on the Variance Inflation Factor (VIF) analysis. Starting from Model 1, investment freedom, fiscal policy effectiveness and economic growth variables were removed in each step. Dropping these variables resulted in an increase in F-value from 6.916 in Model 1 to 15.60 in Model 4. In all four specifications, PRB (wholesale) variable remained significant and has a positive sign. This suggests that the higher the percentage of wholesale banks that are PRB signatories, the higher is the degree of progress towards SDGs. However, results are not the same in the case of retail banks as in none of the models from Model 5 to Model 8, PRB (retail) was statistically significant. This shows that progress towards SDG is associated with the types of banks which are PRB signatories, with wholesale banks playing a clear role. Results also show that corruption and bribery, as well as public accountability were also significant factors playing a role in progress towards SDGs.

Table 3. Multivariate regressions (general-to-specific) with progress towards SDGs as dependent variable.

	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
PRB (wholesale)	24.58*	24.82*	25.18*	26.62**
	(1.85)	(1.93)	(2.02)	(2.50)
Corruption and bribery	−1.008**	−1.042***	−1.067***	−1.080***	−0.967*	−1.017**	−1.076***	−1.138***
	(−2.31)	(−3.15)	(−3.52)	(−3.69)	(−2.04)	(−2.34)	(−3.07)	(−3.29)
Fiscal policy effectiveness	0.00566	0.00492			0.00786
	(0.23)	(0.21)			(0.30)
Investment freedom	0.00788				0.0202	0.0152
	(0.12)				(0.30)	(0.24)
Public accountability	0.694**	0.695**	0.694**	0.692***	0.688**	0.686**	0.689**	0.675**
	(2.67)	(2.74)	(2.79)	(2.84)	(2.49)	(2.53)	(2.60)	(2.55)
Economic growth	−0.163	−0.144	−0.0917		−0.485	−0.397	−0.381
	(−0.33)	(−0.31)	(−0.24)		(−0.98)	(−1.02)	(−1.02)
PRB (retail)					6.575	7.224	7.315	9.541
					(0.77)	(0.89)	(0.92)	(1.24)
Constant	79.29***	80.03***	80.39***	80.26***	78.93***	79.90***	81.23***	80.79***
	(12.37)	(34.58)	(52.39)	(57.22)	(11.61)	(13.63)	(46.22)	(47.39)
r2	0.654	0.653	0.653	0.652	0.610	0.608	0.607	0.590
r2_a	0.559	0.578	0.595	0.610	0.503	0.523	0.542	0.541
F	6.916	8.667	11.27	15.60	5.731	7.142	9.278	12.01
p	0.000314	0.0000987	0.0000273	0.00000634	0.00103	0.000366	0.000112	0.0000463

t statistics in parentheses, *p < 0.10, **p < 0.05, ***p < 0.01.

IV. Conclusion

This article provides empirical evidence that in countries where the share of wholesale banks that are signatories to PRB is higher, progress towards SDGs is at a more advanced stage. However, the same is not the case for retail banks. This can be attributed to the crucial role that corporate and investment banking plays in financing large-scale projects that support the SDGs, such as renewable energy and sustainable agriculture (see UNEP FI 2018). Retail banks in Europe play a weaker role as they typically have a more limited capacity to finance sustainability-linked projects (see European Banking Federation 2019). While these findings lend support to the earlier literature see Lourenço, Branco, and Curto (2020), future empirical research should focus on other parts of the world to present a more complete picture on the link between different banking activities and the progress towards SDG.

Disclosure statement

No potential conflict of interest was reported by the authors.