Altiorem is an online library and resource centre dedicated to facilitating, promoting and influencing the investment and broader finance industry towards long-term, sustainable and purposeful allocation of capital.
This week we are looking at the ethical case for the transition towards sustainable finance.
Ethics in finance has historically been focused on loyalty to clients, as the industry generally acts on behalf of others, and market conduct, to preserve the integrity of the markets they operate in. However, the finance sector also has enormous influence over social and environmental outcomes. Investors, financiers and insurers choose what activities and standards of conduct they will provide financial capital to, or financial protection for, and at what price. They also exercise direct influence through shareholder rights, lending criteria or insurance policy conditions.
The finance sector’s influence and its associated positive and negative impacts occur regardless of whether they are intended or not. As the global financial crisis showed, the sector is extremely important to the functioning of modern-day economies, causing enormous harm when the sector fails to adhere to a broader set of ethical principles. This was exemplified by the predatory lending practices associated with subprime loans.
Far from limited to the global financial crisis, unethical conduct and failure to respect the rights and interests of all stakeholders has resulted in financial institutions facilitating tax avoidance, money laundering and repeated breaches of trust with its clients. It has financed activities which have trampled on human rights, destroyed the environment and undermined democratic processes. The annual Edelman trust survey has found that the finance sector is persistently among the least trusted industries globally.
There are a range of negative consequences for the finance industry from this conduct which, according to the Conduct Costs Project, resulted in the world’s largest banks paying over £264bn in fines between 2012 and 2016.
There is a strong business case for avoiding these negative consequences and related costs along with the harm done to an organisation’s reputation. In addition, there is a great body of research showing the benefits of customer loyalty to employee engagement of ethical and socially responsible businesses. While the business and ethical cases are interconnected they differ in terms of motivation. Increased efficiency and profit can be outcomes of either case however, the notion of the ‘right thing to do’ is the primary motivation guiding the ethical case.
There are a variety of ethical frameworks, none of which are centred around pure self-interest. The most well-known approaches include:
a. Utilitarian Approach — which option will produce the most good and do the least harm?
b. Rights Approach — which option best respects the rights of all who have a stake?
c. Justice Approach — which option treats people equally?
d. Common Good Approach — which option best serves the community as a whole?
e. Virtue Approach — which option leads me to act as the sort of person I want to be?
The Australian Prudential Regulation Authority’s report into governance at the Commonwealth Bank of Australia, found that:
“At its simplest, conduct risk management goes beyond what is strictly allowed under law and regulation (‘can we do it?’), to consider whether an action is appropriate or ethical (‘should we do it?’).”
Injection of the “should we” question into the financial services industry has deep ethical implications.
The majority of the industry is acting for a wide and varied group of clients and its actions have significant positive and negative influences on society and the environment. The ethical case for sustainable finance rests on the responsibilities which come with great power and influence, and the fiduciary and stewardship responsibilities which flow from being trusted with assets belonging to other people. Beneath this lies the broader role of finance; to allocate capital to productive purposes for the benefit of all.
In the same way that the industry has contributed to very negative social and environmental outcomes, it can be used as a force for good. Achieving the sustainable development goals and avoiding the worst impacts of environmental crises like climate change, will depend on a finance sector prepared to reallocate huge sums of capital, and protect the assets, incomes and health of billions of people. Finance can and must be a force for good if society is to rise to the great challenges of our time.
In August 2019, 180 CEOs from the Business Roundtable (an organisation which represents the CEOs of America’s leading companies), signed a new Statement on the Purpose of a Corporation which recognises companies’ responsibilities to broader society. While it is easy to look on this announcement with scepticism, it nonetheless signals a broad and mainstream acceptance of a principle that has been hotly debated for decades.
As this new era begins, it is clear that much more work is needed to realise this vision, in a manner aligned with broader societal interests. Fortunately, in this regard, there are multiple frameworks which can be used to help the finance sector align its activities with those interests. Chief among these are the Sustainable Development Goals, but also include industry initiatives like the Principles for Responsible Investment, the Equator Principles, the Principles for Responsible Banking and the Principles for Sustainable Insurance.
However, frameworks are only as good as the actions which bring them to life. As an industry and key player in the sustainable development challenge, finance must do more than pay lip service and offer half measures in response.
It is for this reason that the ethical case is so important. While it may seem intangible and many will prefer to focus on the business, investment or economic cases, it is the ethical case which must support them and tie them together. In a world which has been described as volatile, uncertain, complex and ambiguous, it is strong ethical underpinnings that will help decision-makers in finance make the right decisions.
The Altiorem library and resource centre organises and summarises research that supports the ethical, business, investment and economic cases for sustainable finance. We will do this so you, and millions like you, can advocate for a sustainable finance sector.
