|
Sustainability
and Accountability in the Financial Services Sector Governments can and must play a key role in creating public policies and regulatory frameworks that increase the ability of the financial services sector to advance sustainability. In addition, governments must also improve accountability from the financial services sector itself, as a way of ensuring that financial institutions are responsive to the needs and expectations of the public. I. Increase
the ability of financiers to advance sustainability - Integrate
environmental and social objectives into their financial strategies;
However, financial institutions are often limited in their ability to implement these practices because of current laws, and because avoiding certain types of transactions can put responsible financiers at a competitive disadvantage compared to their more unscrupulous competitors. Also, faced with imperfect markets, financiers find it "cheap to do bad things, and expensive to do good things" because the costs of environmental degradation and ill public health are often externalized onto the general public. Such barriers can only be overcome by governmental action. A. Integrating
environmental and social objectives into financial strategies - Changing the definition of fiduciary responsibility: In many countries, strict interpretations of "fiduciary duty" discourages investment managers and trustees from examining the social, economic and environmental dimensions of their investment choices. Regulators should clarify that consideration of environmental, economic and social issues is not in violation of, and in fact could advance the fulfillment of, fiduciary duty. Governments can also expand the definition of fiduciary duty to include the broader well-being of beneficiaries. - Public investment policy: Government regulators should create socially and environmentally responsible investment policies and objectives for public finance agencies and governmental retirement funds. For example, public export credit agencies should adhere to high universal environmental and social standards, and require co-financiers (e.g. loan syndicate partners and recipients of loan guarantees) to do the same. B. Analyzing
the social, environmental, or development impact of potential transactions - Corporate disclosure laws: Governments should implement corporate social and environmental disclosure regulations in markets around the world. Environmental and Labour Ministries should create disclosure laws that obligate companies to report data such as toxic releases, or worker health and safety data. For example, in the United States, the Community Right to Know Act requires companies to disclose toxic releases in a national Toxic Release Inventory. - Securities disclosure laws: National securities disclosure laws should require reporting of material environmental, social and other corporate responsibility data. For example, France currently requires disclosure of key environmental and worker health and safety data in company annual reports. - Protection of civil rights: In order to perform adequate due diligence about the social, environmental, or economic impacts of a potential transaction, financial institutions often rely on civil society organizations as a source of information, particularly in markets where disclosure regulations are poor. Therefore, governments should support the preservation and promotion of civil and political rights and freedoms around the world, particularly in developing countries. - International securities and accounting standards: The International Accounting Standards Board and the International Organization of Securities Commissions are currently working to harmonize corporate accounting and disclosure standards across major markets. The IASB and IOSCO should ensure that best practice in environmental and social financial accounting are promoted. C. Using
influence and pricing capital in ways that promote sustainable practices
among their clients and investments - Shareholder rights laws: Shareholder rights are in part defined by state or national securities and/or company laws, which delineate the requirements for filing shareholder proposals for both domestic and foreign investors, including topics which are considered appropriate for shareholder action. For example, securities laws in the United States provide relatively strong rights to investors by allowing smaller shareholders to submit proposals, and by providing a degree of supervision from the Securities and Exchange Commission when companies and shareholders disagree about the appropriateness of a proposal. - Incentives for sustainability: Regulators can create incentives for financial institutions to capitalize environmentally/ social beneficial enterprises, and for activities that generate income for the poorest. For example, the Netherlands has introduced tax-free green funds (exempt from interest and dividend income tax) to encourage Dutch citizens to invest in environmentally beneficial projects. Other incentives could include giving banks a small degree of flexibility in their capital adequacy requirements in return for prioritizing sustainable investments. The new Basel Capital Accord ("Basel II") could also integrate sustainability factors into its new methodology for evaluating banks' risk. D. Proactively
financing enterprises that reduce poverty, enhance equity and restore
the environment - Bank regulation: Requiring commercial banks to lend to economically distressed areas may help create markets, institutions and financial products that promote community investing. United States example: The US's Community Re-Investment Act requires commercial banks to target a certain portion of their portfolio to investment opportunities in the bank's local economy, especially those consumers that are historically disenfranchised. Banks are also ranked on their compliance with the Act. The CRA has helped create an entire sub-sector of community development financial institutions in the United States, which specialize in providing access to capital and credit to low-income and distressed communities. Similar regulations could also be applied to investors such as collective investment schemes. - Protect community investing from trade agreements: Common trade-related investment measures may harm the existence or effectiveness of community development financial institutions. For example, provisions for "national treatment" forbid governments from establishing or maintaining some investment preferences to promote development in impoverished or minority areas. The "national treatment" provision could nullify banking laws in the Philippines that reserve rural banking services to indigenous financial institutions, which often have particular capacities to serve the rural poor. Similarly, the US's Community Re-investment Act conditions the opening of new bank branches on a company's community re-investment record; this could be challenged under the investment agreements to the WTO. - Capitalize community investment vehicles: National and state governments can help capitalize community development financial institutions. For example, in the US, the Community Development Banking and Financial Institutions Act of 1994 created a fund to promote economic revitalization and community development by investing in and assisting community investment financial institutions through equity investments, capital grants, loans and technical assistance. E. Minimizing
Externalities and Market Distortions - Stronger and better enforcement of environmental and social laws: Where there are lax or weak enforcement of environmental and social laws, there are fewer monetary sanctions or impacts for companies with poor social and/or environmental performance. Strong and well-enforced environmental and social laws can help send the right market signals to investors. - Provide the right financial incentives: Aligning governmental subsidies, procurement and tax policy to create financial rewards for responsible corporate behavior/ activities and disincentives for environmentally or socially harmful corporate behavior/activities can help the stock market reflect the bottom-line benefits of corporate social responsibility. However, the ability of governments to align procurement policies with environmental, social or other public policy objectives may run afoul of "expropriation" provisions in international trade agreements. - Create market imperatives: Government policies and sectoral objectives often create markets in and of themselves. For example, in Germany, France and other European countries, national authorities have committed obtain a certain percentage of its country's energy from renewable sources. Such targets and timetables create market imperatives that enhance the ability of financiers to set and meet their own goals for shifting their energy portfolio into more renewable investments. II. Governance and Accountability in the Financial Services Sector Currently, financial institutions are not held accountable for the downstream environmental, social and public health impacts of the transactions they finance. Similarly on the "upstream" side, small savers rarely have a to have a voice in the investment, credit, and underwriting practices of the institutions that manage their savings and investments. - Increase lender liability: In most countries, lenders generally are not held liable for the environmental and social impacts caused by client misconduct. However, as long as lenders remain financially shielded from the environmental and social liabilities of their corporate clients, they will not fully value environmental and social issues when performing their due diligence and pricing capital. - Crack down on predatory lending: In some markets, financial institutions engage in "predatory lending" practices which banks aggressively sell inappropriate loans designed to exploit vulnerable and unsophisticated borrowers. Regulators should pass and enforce strict laws designed to abolish such exploitation and sanction predatory lenders. - Disclosure in and of investment products: In order to inform consumers in their choice of managed investment products, consumers need to know the ethical policies and impacts of such funds. Laws requiring the disclosure of a fund's ethical investment policies, proxy voting policies and practices, and even portfolio holdings can assist consumers in choosing or benchmarking investment products. In the United Kingdom, recent law requires pension funds to disclose their ethical investment policies and practices, if any. - Democracizing investment funds: Governments should promote greater democracy in investment funds, including governance practices that provide for better participation of fund participants or beneficiaries. For example, new laws could oblige pension funds to elect a portion of their trustees from among their beneficiaries, or require mutual funds to integrate participant input into proxy voting policies.
|
|
