The financial systems as a catalyst to achieve the UN Sustainable Development Goals
The word “sustainability” has become one of the most used and abused word in the contemporary world. International Organizations, States, NGOs and other Institutions stress, each day, the urgency to change our personal and corporate lives. Moreover, our idea of income is also changing to take into account natural capital, like the environment, and the wider stakeholder community.
It has also been widely recognized that social justice is a key precondition in order to achieve improved air quality and cleaner waters. This is not an old, romantic, hippy dream, but is instead the conclusion achieved by serious and famous economists, like Kate Raworth. In her donut economy model (Raworth 2017), Raworth explains the correlation between pollution, the incoming environmental disaster and the social injustice.
The business world has been discussing sustainability from more than forty years and, increasingly, young leaders from all over the world, nurtured with the idea of sustainability, are entering their professional careers. This new business generation is global, thanks to an education system that, when it comes to sustainability, is spreading the same worries and values to all the continents.
It is clear that Globalisation will continue and therefore, in order to save the world and humanity from a future collapse, sustainability measures need to be global as well. As such, regional or national solutions make sense only if they are an example to be followed globally.
Civil society is also changing quickly and many consumers are becoming increasingly conscious of their quality of life. This represents a shift from the purely consumeristic approach that developed in the Western World following World War 2. In supermarkets it is now possible to meet families, who, in the hope of improving their lifestyle, are ready to pay a premium to eat biological and organic food.
On the other hand, the business world changes at a slower pace and the financial results are still the major indicators of the soundness of a company. Due to the developments in data gathering and elaboration technologies, businesses are now required to provide financial data more often than in the past. In particular, investors now expect to be able to monitor the financial status of their investments daily, while analysts require detailed information every quarter. This constant demand and review of financial data not only re-enforces the current importance of financial results, but also serves to create a short-term focus on strategy for most companies. This often comes at the expense of longer term, more environmentally and socially friendly, strategies.
Over the past fifteen years, the UN millennium development goals (MDGs) have achieved only moderate results, such as the slight death rate reduction and the increase in economic growth of very poor countries. Unfortunately, these positive results vary greatly among different countries and, arguably, some of them could have been achieved without the UN programme.
Furthermore, these changes have not impacted the development of rich countries and have not answered some key global questions, such as on the environment and social justice. In fact, as the Mitchell’s stakeholder model (Mitchell et al 1997) proves, the environment and social justice are stakeholders with legitimacy, but without power. If a stakeholder doesn’t have power it means it doesn’t have a voice, and therefore it is not considered by people and entrepreneurs. To change the world for the better it is therefore crucial to provide the environment and social justice with power.
Unfortunately, power can only be provided to these stakeholders if consumers are ready to change their habits and if large corporations will pay more attention to their reputation by also taking into account the ethics of their supply chain. However, durable and effective results can only be obtained if the banking system is involved.
The need to involve the banking sector has become more important due to the UN’s decision in 2015 to replace the Millennium programme, with a new programme, named the Sustainable Development Goals (SDGs). The UN SDG programme was adopted by the UN General Assembly and states committed to realize the programme’s 17 different goals by 2030. To achieve these goals in the next 8 and a half years, it is compulsory to involve the world banking system immediately. Banks are global institutions and even small banks can count on a network of correspondent institutions nationally and abroad. In addition, banks operate in the same way all over the world as they buy and sell the same fungible product, money. Finally, banks have the power to either provide or refuse money to the commercial and productive sectors of the economy, thus no company can live without banking support. Starting from payments management to the financing of projects and even to the capital market, companies need banks in order to operate. In one expression, banking is the blood system of the global economy and, as such, banks have the power to check all financial transactions and ask for their reasons.
Banks have to observe strict compliance rules in order to keep their only real value: reputation. As a result, banking institutions are under tight control from either local communities, or national or international structures, such as central banks, the Basel Committee on Banking Supervision and so on. Regulators, national and supernational organizations check the banks’ risk management, their capital requirements and, last but not least, the activity of their clients, particularly about matters such as money laundering, terrorism and so on. The main aim of this article is therefore to oblige banks to enlarge their compliance to also include the analysis of their clients’ internal and external supply chains.
Banks can collect all the information they need directly, or through their relationship network with local and foreign banks. This information is much more useful than just hypocritical declarations signed directly by their clients. Such declarations are sometimes required by banks just as a way to protect their reputation in case of scandals, instead of truly improving their knowledge on their own clients. The information collected directly or via the banking network can actively be used when deciding whether to extend credit lines, and not just kept in the client file as a form of compliance.
Supply chain information is key in order to avoid exploitation, injustice or pollution. It allows banks to collect additional information regarding both the production processes and the client’s suppliers. The client’s suppliers are important from a social point of view, as they are often located in poor countries with weak, and poorly implemented, regulations. Local banks, who are interested in maintaining their reputation, can help their foreign counterparts by providing information on the local companies in the supply chain. This information can then be checked by the lending bank against the information it receives directly by their client.
This exchange of information is not an additional encumbrance for banks; in fact banks are already used to ask for this information when they extend joint credit lines in the frame of large projects, involving international organizations, such as: the World Bank, EBRD, the European, African, Inter-American and Asian Development Banks. However, this activity is not often carried out during the daily banking activities, even if could be easily standardized or, at least, carried on a sample basis, particularly when there are doubts about the clients’ activity. It is important to note that banks know a lot of sensitive data about their clients. This data is obtained not only through financial documents, but also from the other sources, like contracts, payments and so on. As a result, banks can largely define what clients need to be checked based on the information they already have available.
Gathering additional data on the client’s activity and on its supply chain could therefore be viewed as a waste of time for the bank. On the contrary, it is necessary to stress that it represents an indicator of transparency and good reputation. In addition, the cost of banking personnel can hardly considered a direct production cost, and as such, the activity to gather additional information could be done by the existing personnel together with other duties.
Financial institutions, particularly the midsized ones, are committed to do charitable activities and to support the local economy. This is usually done for marketing reasons and to compensate for the bad comments surrounding the banking activity. In particular, some banks are often criticised for focusing too much on global finance at the expense of the real economy. Sustainability, therefore, offers a great opportunity for banks to address this concern. If banks are to become the driver of sustainability, they would need to stress their commitment to the real economy, deciding which clients deserve to be served and which don’t.
However, banks are not yet ready to collaborate voluntarily, because of the following main reasons:
- compliance is already a huge cost for banks and so banks are scared to increase it;
- banks prefer to occupy a neutral position between clients.
The bank neutral position was key in the past, but now, credit institutions are already requested to dig deep inside their clients’ activities and to take their share of responsibility.
Coming close to 2030, the international community is starting to increasingly understand that the banking system should be obliged to carry out this extra due diligence work. Recently, the European Union issued a new regulation (EU Regulation 20219/2088) in order to get information from the European banking system about the sustainability of the financial system. This request is only a preliminary step, as at the moment banks are only required to indicate the guidelines of their activity regarding sustainability and are not requested to implement any new procedure to check their clients. However, getting banks to formalise on paper their strategy in this contest is already an important first step.
Even the USA, after ignoring the problem for decades, seem now, from the actions of President Biden, to understand this issue. In particular, the US will be organizing a summit in April 2021 concerning sustainability, where Russian President, Vladimir Putin, and Chinese President, Xi Jinping, have been requested to take part together with other leaders of the developed countries. The only useful result expected from this summit will be to enforce and speed up the process of imposing an active role to the banking system.
Voluntary sustainable choices from the corporate world have, unfortunately, proven inefficient. Very often competition is a good excuse for closing an eye to social or environmental exploitation, resulting in the non-financial balance sheet becoming just a hypocritical activity to compensate for the daily bad behaviour. Non-financial balance-sheet, or similar declarations to be added to the balance, are produced by 90% of the index SP500 companies; however this voluntary disclosures do not mean to change the way in which profit was achieved and the number of stakeholders considered.
In this regard, several banks distinguish themselves because of better conditions for their employees and a high respect of the environment in the premises where the banking activity is done. However, these conditions are not checked so carefully when evaluating the clients’ activity and, even less, when the question is the soundness of the clients’ supply chain.
The supply chain is not just an issue related to poor countries, located very far from the developed world. Very often the gathering of fruit and vegetables or the production of garments is done by modern slaves living illegally in developed countries.
Banks can play an enormous role by looking for a wider meaning of profit and for a “blended value” (Emerson 2003). “Blended value” is an indicator that includes all the possible data concerning the transparency of the client activity and checks for all the possible elements of injustice against people or the environment. Of course, the risk is to provide too much power to the financial system, but this risk could be mitigated by the network of organizations and regulators checking the banking activity globally.
If banks are able to break down the environmental and social injustice, companies will be able to continue to compete between themselves without the risk in taking un-sustainable shortcuts. The average level of prices in the market will be higher, to compensate for the improved social and environmental conditions, but, as demonstrated, communities will be ready to pay for this.
Emerson, J., 2003. The Blended Value Proposition: Integrating Social and Financial Returns. California Management Review, 45(4), pp.35-51.
Mitchell, R., Agle, B. and Wood, D., 1997. Toward a Theory of Stakeholder Identification and Salience: Defining the Principle of Who and What Really Counts. The Academy of Management Review, 22(4), p.853.
Raworth, k., 2017. Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist. 1st ed. Cornerstone Digital.