Leaders in Geneva's SDG and finance communities are trying to put society back into sustainable finance. Wednesday's "warm-up" to the industry-wide Building Bridges Week two months from now will try to move discussions along so that the focus can be on concrete action come November.
Green sustainable finance has been all the rage in recent years. The EU Taxonomy, which provides measuring and reporting frameworks for environmental sustainability for the finance sector, got a red carpet roll-out in 2020.
The EU Taxonomy is one of the latest and most ambitious frameworks for taking an ESG-centred approach to business – one conscious of the environment, society, and governance. The problem is that the “E” gets most of the limelight, many experts say. The “S” in particular has been left behind.
The state of the ‘S’. Social sustainable finance is finance that is socially responsible, including on labour conditions, human rights, and client protection. Experts from industry, academia, and government are meeting on Wednesday to discuss the social dimension’s plight.
“Climate change is indeed the question of the century, but social inequality is the question of the decade,” Bruno Roche, founder and executive director of Economics of Mutuality (EoM) told Geneva Solutions. EoM is a management consultancy that works closely with universities to educate the next generation of financial leaders.
This is not to say that one is more important than the other, he stressed. Rather, humanity is feeling the brunt of social inequality now, due to any number of deeply-seated structural problems that climate change is making worse. It is crucial to tackle climate change, but also the other roots of social inequality.
Building Bridges Week in November will be a meeting of minds from across the financial sector to develop concrete plans for green, socially responsible, and well-governed finance.
A “warm-up” to November, Wednesday’s meeting provides an opportunity to do much needed catch-up on the social side.
The SDG Lab, together with the International Institute for Sustainable Development (IISD), is pushing the conversation forward by organising this event in response to calls from actors within the UN and finance communities, said Trine Schmidt, IISD policy analyst with the SDG Lab, a multi-stakeholder initiative for implementing the Sustainable Development Goals (SDGs).
The event is organised in partnership with Sustainable Finance Geneva (SFG), the Graduate Institute, EoM and InTent.
Not complex enough to tempt. One reason that the social side of sustainable finance is lagging behind is that for too long the industry has considered the social side common sense, said Patricia Richter, senior technical officer at the International Labour Organization (ILO) who will be speaking at the event on Wednesday.
Environmental science, on the other hand, has been viewed as more complicated and more quantifiable. Industry has consequently been more active in seeking out environmental advice and developing environmental metrics, said Richter.
Industry’s greater gravitation towards environmental issues has meant that social issues have been siloed, often ending up in a separate department, or simply forgotten, she said.
“We need to understand that sustainability has several components. There is an environmental component, and there is a social component. Only when we understand that they go together in the industry will we be successful, because we cannot give up on one without detriment to the other.”
Too important to ignore. There is money in being social. “When companies make a conscious decision to invest in interventions that will grow social and human capital while protecting the environment (the natural capital), not only do they have a better impact on society and the environment, they are also more performant, even from a purely economic angle,” said Roche.
“Instead of making money first and sharing afterwards, which is the charity and corporate social responsibility approach to responsible capitalism, we propose a model that embeds the sharing of value into the business model from the outset,” he said.
“Human beings are relational beings. We often forget the power of relationships. Our relationships explain a lot about the impact we have on society, on the environment and on performance.”
Roche compares this approach with what he refers to as a “power relationship” found in many business dealings today – one in which the more powerful the player is, the more they can extract from others.
“That works,” he said. “But what we are demonstrating is that a relationship that’s mutual yields a higher order of value creation.”
EoM’s guiding question is what the right level of profit should be. It is a question that the Mars corporation – famous for the Mars bar – asked 15 years ago, when Roche was chief economist there. The question has given rise to a new school of thought that is catching on in universities as well as other companies.
“We call it economics of mutuality, because when mutuality is at the heart of the relationship that a company has with its stakeholders, both its positive impact on society and the environment and performance increase,” explained Roche.
Headquartered in Switzerland, EoM consists of the public interest EoM Foundation and the EoM Solutions management consultancy.
Social measurement. Not only are social and human capital important, they are also measurable, said Roche.
“We can now measure them through simple, peer-reviewed and robust methodologies. They happen to be stable and actionable across business situations, and we can collect them through standardised, simple and repeatable surveys,” he said.
EoM measures trust, capacity for collective action, and social cohesion within a defined ecosystem. These metrics explain 80 per cent of what you need to understand in social capital — and how it impacts the performance of an ecosystem, he said.
A problem, however, are the many different systems for classifying social sustainability.
There are more than 160 different ESG methodologies. “It is at best confusing, at worst misleading,” Roche said.
The EU Taxonomy, put into effect in 2020, is widely considered an innovative north star for environmental classification, even beyond the EU. In being a regional framework, it has clout amid the diversity of national, sectoral and company frameworks, where they exist.
Many investors and fund managers in the inclusive finance industry were all the more frustrated by the European Taxonomy’s lack of reference to the inclusive finance industry’s 30-plus years of experience and learning, said Jürgen Hammer, managing director of the Social Performance Task Force (SPTF). SPTF is a non-profit membership organisation that connects industry stakeholders.
“SPTF was established in 2005 on the observation that there was a huge confusion of methodologies, tools and approaches for evaluating the achievement of the social promise of microfinance,” said Hammer.
Building on the wheel. Hammer hopes the European Commission decides that a fully-fledged social taxonomy is necessary.
Some within the European Commission question the need for a separate social taxonomy out of fear that the Taxonomy would become too unwieldy, he explained.
SPTF and others have stressed to the Commission that the industry needs guidance on social issues. The organisation is now part of discussions at Commission level.
Hammer is optimistic that there will eventually be auditable international reporting standards for green and social reporting, like there are for financial reporting.
The EU Council’s incoming French presidency for the January to June period has shown signs that it will make social responsibility a priority, Roche said.
Though there is more work to do, SPTF’s frameworks and tools offer a strong foundation for a common social taxonomy, said Hammer. In 2012, SPTF published the first universal evaluation tool for socially responsible microfinance.
“Let’s not reinvent the wheel and start from zero,” said Hammer.