Impact banking: Triodos – a banking ethos that works for all?

UN Sustainable Development Goals

"Everybody is a banker. You have investments, a current account, a pension. You have a balance sheet with obligations and liabilities and assets. Effectively, you are running a small bank that is you and, through your money, you are connecting to and impacting millions of other people.” 

If Peter Blom, chief executive of Triodos Bank, had said this 10 years ago – that individuals are actually in control of their money, and through that control can bring about positive social and environmental change – it would have fallen on deaf ears. 

Now people are listening. 

Triodos Bank was perhaps early and optimistic about how fast we would all catch on. 

It was set up in 1980 in the Netherlands, financing the early renewable energy industry. Its activity broadened to cover green, ethical, social and culture-oriented loans and investment funds, as well as venture capital and private banking services. Its strategy was simple but entirely progressive back then: a sustainable bank financing sustainable businesses with social, environmental and economic value.  

Triodos had its share of critics. Financing organic farming or health clinics that included natural therapies was deemed a little ‘out there’ by some. As today’s millennial population walks around in shoes made of recycled plastic straws and drinks organic turmeric and activated cashew milk, Triodos seems like part of the new normal. It finances wind farms, affordable housing, childcare, health centres, organic food businesses, microfinance institutions and museums. 

The financial crisis 10 years ago acted as an awakening. Suddenly people began to pay a little more attention to where their money had been going while on deposit at the bank. Now a decade later, Blom says the mindset has evolved. 

“The crisis blew apart years of accepted economic theory,” he says. “The ‘invisible hand’ doesn’t entirely work. We’ve seen this increasingly because in free markets we’ve had the experience of taxpayers having to bail out banks.”

Blom’s not a believer in state-owned banks, but his ethos around banking lies somewhere in the middle of the public to private spectrum. 

“The private sector cannot act entirely out of self-interest,” he says. “It doesn’t work. And if taxpayers are picking up the bills, then the orientation should not be on shareholders and profits but rather stakeholders – clients, employees, society.” 

Triodos continues to operate its own model. All its share capital is held in a dedicated foundation. That foundation, which supports the mission of the bank, issues depository receipts that carry economic rights, and the owners of depository receipts (some 44,000 right now) receive annual dividends. Those owners vote for the foundation’s board and the board exercises the voting rights at the annual general meeting. 

It also “means the voting power in AGMs is always in the hands of the foundation that has a clear mandate to serve society and also consider the long-term sustainability of the bank,” says Blom. It also makes it impossible for anyone to take over the bank or have one shareholder exert influence.

Blom is convinced that the pressure to serve shareholders is one of the biggest challenges the banking industry has to address: that shareholders’ expectations of profits are working against society and that quarterly reporting creates short-termism that does not match society’s long-term needs. Triodos’ model puts those questions to bed. 

Triodos has €14.5 billion in assets under management and last year its profits were €37.4 million. Return on equity was 3.9% and 2017’s dividend payout was €1.95 per depository receipt. It is a return at the lower end of the spectrum for banks of its size, but that is what shareholders want and expect – financial return for themselves is not their sole focus, in the same way it is not the sole focus of senior management. Rather its success is measured equally by the business it carries out and how it carries out. 

It looks and feels how many banks would like to – and certainly how many of the younger generation would like a bank to look. Triodos is now in four countries beyond its home in the Netherlands: Belgium, Germany, Spain and the UK. It also has an operation focused on business lending in France and plans to open a branch there once all of its regions are profitable. Germany and Spain have yet to break even. 

In the Netherlands and the UK the bank operates a retail bank taking deposits and making loans – but with a difference. 

One hundred percent of the business loans the bank makes are for businesses that will have a positive social or environmental impact. 

“We ask all our customers: ‘What is your contribution as a borrower to society?’ And then if that answer is satisfactory, we’ll then take a look at the financials,” says Blom. 

The rest of its loans are made to non-profit organizations and local authorities, as well as in sustainable mortgages.

With products for customers more akin to a credit union, Triodos offers depositors the chance to invest in local social and environmental enterprises. It has also recently started using a crowdfunding platform – something it thinks all retail banks could consider, although Blom points out that Triodos benefits by having deep long-term relationships in communities, which not all large banks would have. 

Triodos’ UK business is the first to fully embrace the initiative, launching a platform in January this year that so far has had eight projects, five of which have closed, raising over £18 million. The investments vary in size, sector and location, including a £300,000 5% bond for a local organic brewery in Stroud; a £1.75 million 5% inflation-linked bond backed by a wind turbine for a remote community in the Scottish Highlands; and a £5 million 5.5% bond for Thera Trust, which helps adults with learning disabilities get access to housing.

This matching of impact investments with customers is not new to Triodos UK. For the last decade it has been marrying its retail and foundation clients with investment opportunities. But opening that up via a platform familiar to many younger customers is a clever move. 

Whitni Thomas, senior investor relations manager in the UK corporate finance team, points out that close to two thirds of the money raised this year has been from customers new to Triodos – a mix of individuals, investment funds and charitable trusts and foundations. For retail bank customers, it is highly attractive. You can have your money in your bank’s savings product earning 1% to 2% from who knows what or, if you are comfortable taking a bit more risk, you can use those savings to fund a local or national project that will improve society and could earn between 3% and 7%. 

In contrast to a regular crowdfunding platform, all the projects have gone through an average of six months of due diligence from Triodos’ advisory team. 

“These are all investments we are comfortable with,” says Thomas. These include the financing of Rendesco’s low-carbon heating systems for retirement homes. “It’s a commercial opportunity, so a little different to the usual investments, but it is backed by a government subsidy, so we know the revenue is solid.”

Triodos crowdfunding project Burnham & Weston Energy CIC

What the product also captures is the current zeitgeist for more community-oriented solutions – such as the financing for the small towns of Burnham, Highbridge and Weston-super-Mare in England. As local energy companies have been regionalized, nationalized and then privatized, energy has become a drain on the local economy of towns such as Burnham and Weston. Over £360 million was spent on energy a year yet almost all of it left the local economy, while around 15% of households were living in fuel poverty and with health-related issues. 

So a community group got together intent on setting up a 9.3 megawatt community solar farm on local pasture, financed with the help of Triodos. The project raised £4 million in financing, paying a 5% interest rate over 23 years, and still is able to give £3 million to the community for local projects and to help households pay their energy bills. 

It is an efficient means of providing energy to Burnham and Weston, not to mention the cleanest and the most beneficial to society. It reduces the pressure on local government and healthcare services, and is a story that everyone wants to be a part of. 

Triodos is filling the financing gap that many social and environmental enterprises face with innovative retail-friendly structures. 

Take the case of Fishtek Marine, run by Pete and Ben Kibel. 

The pair have a background in fisheries, and alongside engineer Rob Enever, had developed several products that, when used by fishermen on their lines or nets, stopped by-catch of species like dolphins, whales, porpoises, sharks and turtles. 

“Because we were only two years working on the products, with only a turnover of several hundred thousand pounds, we knew a bank wouldn’t lend to us to grow,” says Pete Kibel. 

But he had worked with Triodos before, raising money through a bond that financed hydro-electric technology he and his brother had designed to help save migratory species. 

Now Fishtek Marine is seeking to raise up to £900,000 in Triodos’ first equity raise on the crowdfunding platform. 

“We’re already getting reports from fishermen that whereas they were killing two or three dolphins a week, they’re now not killing any at all when they use our sonar pingers,” says Kibel. “As legislation around sustainable fisheries increases, we’re confident of our growth trajectory. The raise means we will be able to progress the development and save the lives of hundreds of thousands of sharks, sea turtles and marine mammals.”

Thomas says crowdfunding is also an awareness-raising tool (another over-arching goal of the Triodos Group). 

“It’s a way to engage with people more broadly and hopefully get them to understand what their money could be doing while it’s on deposit at their bank or in a savings account,” she says.

There’s a shift occurring from investors simply screening out negative impact investments and now looking for positive impacts, says Thomas. Although they can only do so if there is a pipeline, which is what the platform is creating. Businesses and organizations are now contacting to Triodos to apply for listing on the platform. 

For larger impact investments not connected to the retail bank, Triodos has an international investment management arm. It has €4.2 billion in assets under management in both screened socially responsible investment funds and impact investment funds that make direct investments in areas such as inclusive finance, energy and climate, sustainable food and real estate. 

Triodos Investment Management has co-financed, for example, the largest solar-power plant in Mongolia, natural-gas powered taxis in Peru and 12,000 solar panels at Dutch brewer Heineken. 

Of the two types of funds, it is the direct investment in business that is the more resource-heavy programme for Triodos, which may deter other banks from following suit. But returns are above market rates and the impacts demonstrable and measurable. Its microfinance fund saw net asset growth of 7.7% last year – and 83% of all loans went to women. 

“We’ve been making these impact investments for over 20 years – particularly in microfinance and renewable energy – so we have built up an expertise and network that makes it easier for us to source investment opportunities,” says Marilou van Golstein Brouwers, who runs the subsidiary. “It’s important to have sector expertise if you’re going to go into direct investing as a strategy.” 

It is also early in some sectors to scale up, she says. “We might be able to scale up in more developed sectors such as inclusive finance, but in health and education the impact investment industry is still in an early phase.”

But that should not deter larger banks from following their lead. 

“We’ve reached a point that the challenges we are facing as a society require capital and investment to be solved,” says van Golstein Brouwers. “Whether investments are resource-heavy or difficult, we really have no choice now but to embrace them.” 

Blom points out that it is simply where the future is. 

“We’re transitioning to new economies guided by sustainability – there’s going to be healthy competition as demand for investments increases,” he says. “The key for banks who are serious about this, however, will be to completely integrate sustainable principles, not treat it like a side fund.”

There are also internal benefits for financial institutions that commit to impact investing. 

“Talented and thoughtful 25- to 35-year-olds want to work for us,” says van Golstein Brouwers. Not every financial institution can say that. 

Blom points out that, while Triodos may be innovative and a leader in newer areas like impact investing, it also does what banks are supposed to do. 

“You can be values-based, but you won’t have any customers if you don’t do all the things that customers just take for granted you are going to do,” he says.

These include providing current accounts, savings accounts, online banking, mobile apps, international transfers and yes, biodegradable debit cards, as well as mortgages where interest rates are tied to the sustainability of your property. 

It can be hard to accept that this isn’t a gimmick – that Triodos has actually lived and breathed what other banks and their marketing and corporate social responsibility departments are now trying to shoehorn into their current models. 

There is a sense that the genuine work of Triodos might get lost in the noise of other banks’ commitments to sustainability – although that is clearly what its founders would have wanted. 

Blom says he is happy to see banks doing what Triodos was doing 10 years ago. It is a genuine sentiment. 

Triodos is a founding member of the Global Alliance for Banking on Values (GABV), which is looking at the creation of principles and measurements for banking and the industry’s direct impact on the economy. 

It is not an easy task, says Blom, to quantify the impact of finance on society. 

“What’s the measurable risk to society of not funding SMEs, or for funding only the 20 largest corporations, or for funding fossil fuels?” he asks. “There’s no concrete way of measuring that – at least not yet. And then what is the internal risk, like the risk in our financial markets that perhaps wasn’t there 10 years ago because of climate change – the risk of stranded assets? I think people sense there is a consequence in focusing only on profits, even if it’s hard to measure with great precision right now.” 

Is Triodos’ model the ideal one for modern banking? Blom is realistic. There are financial pressures for Triodos, some of which are a directly a result of its model. Also, it has never borrowed money from the financial markets or larger institutions in its lending capacity. Rather, it lends from the pool of money of its depositors. 

The low interest-rate environment therefore hits the bank harder than its mainstream peers. 

“They can borrow against negative interest rates, but we don’t want to go below a zero rate for our depositors, so we’re under some financial pressure there,” says Blom. “But we speak to our shareholders about it, and everyone understands what is happening.”

The other challenge is one that all small to medium-sized banks face relative to their larger competitors – that of regulatory costs. 

“Politicians understand that we are disproportionately burdened, but they’re finding it hard to define ‘level playing field’ and to address how to regulate fairly across different sized institutions,” says Blom. “It will be one of the biggest challenges for them over the next five to 10 years, I imagine – and therefore for us too.” 

Transparency is going to be crucial to future of sustainability in banking – and it is slow in coming. Many large banks will cite that it is hard for them to get granular data or that it is inappropriate to share, but Blom disagrees. 

“Privacy is one thing – you have a confidential relationship with your client to uphold – but it’s not true that banks couldn’t provide more detailed and aggregated data on their holdings,” he says. “The type of fossil fuel companies you are financing and what your lending is financing and how you’re making money – that would be helpful for consumers and society to know.” 

The retort from banks is that they can only be as transparent as their client. 

“It’s an excuse,” says Blom. “We ask our clients about their businesses, that is how we manage risk. For example, we might ask: ‘How many women in management do you have?’ 

“Now, you have to make sure your definitions of ‘management’ are clear, but absolutely it’s possible to know what your client is doing and therefore what your overall exposure and profile is to various social and environmental criteria. Without greater transparency from larger banks, any move towards a more sustainable banking industry will be slower.” 

Triodos offers full transparency. In 2017, turnover of its 1,377 staff was 9%, the percentage of women on the management team was 44% and the ratio of highest to mean salary was 5.7. Its CO2 emissions per full time employee in 2017 was 2.36 tonnes – and these are just highlights of the much more detailed annual report. 

As awareness of the connection between society, the environment and finance continues to grow, Blom is optimistic that the model of banking will come closer to Triodos’s example. He is waiting for the tipping point. 

“ If we could just get 15% to 20% of people making a conscious choice about who they bank with, and get values-based banking representing 15% to 20% of the entire banking industry – then the large banks would really begin to rethink their business models.” 

These are the areas that the United Nations says banks need to consider when accepting their responsibilities in shaping and financing a sustainable future.