Ethics and Sustainability in Finance: Two Crucial Aspects To Fight Climate Change
Sustainable finance has received increasing attention from governments, organizations, and investors in recent years. New rules aiming to foster sustainable investments have been introduced in various jurisdictions, and many companies seem to be willing to prioritize sustainable objectives in their strategies and operations. Ethics also plays a role in how sustainability goals are pursued and how operations are implemented. Acting ethically is fundamental to promoting trust in all financial services and business activities, including those with a sustainable purpose.
This was the main focus of the award ceremony of the 8th edition of the “Ethics and Trust in Finance for a Sustainable Future” prize, which was held virtually on 18 November 2021. CFA Institute is one of the main partners of the competition, for which young people under the age of 35, with a relevant interest in ethics and finance, were invited to submit a short original paper, including analyses and proposals on how to foster ethical behavior and trust in financial activities and ways to encourage a more sustainable economy.
Mairead McGuinness, commissioner for financial services, financial stability, and Capital Markets Union, European Commission, gave the keynote speech during the webinar. She underscored the fact that trust in the financial sector, and particularly banking institutions, is is currently lower than all other business segments. This downward trend in trust has taken place since the global financial collapse in 2008 and the bailout of several banks, and it is taking time to restore confidence in the sector. Financial services have a significant role to play as they contribute to meeting the ambitions and needs of society, including the fight to halt climate change. Organizations are expected to send clear signals to investors on the steps that they are ready to take in reducing carbon emissions and addressing their environmental impact.
In July 2021, the European Commission launched its Renewed Sustainable Finance Strategy, which aims to develop an inclusive regulatory framework to support the financing of the real economy as it transitions towards sustainability. This strategy seeks to improve the resiliency of the financial sector and its contributions towards achieving climate goals.
The webinar featured a roundtable discussion, which was moderated by Josina Kamerling, head, Regulatory Outreach, EMEA, CFA Institute, as well as copresident of the prize and the international jury of experts that assessed the competition papers. The discussion revolved around the question whether the focus on sustainability makes ethics redundant. Hakan Lucius, head of corporate sustainability at the European Investment Bank, stressed that world governments recently agreed on sticking with the Paris Agreement targets of limiting the rise of global temperature below 2°C degrees compared with preindustrial times. Most people, however, do not trust in the achievement of such an objective. This reveals how trust, ethics, and sustainability are components that currently are lacking and exemplify the challenges we are facing.
Lucius added that the concept of sustainability as a business approach focusing on stakeholders originated about a century ago, when Henry Ford argued that no company will survive without making profit, but also no company will survive only by making profit. Such an approach illustrates how organizations make their profit, what their values are, and how they deal with employees and suppliers; in general, it also represents the mindset of a successful company.
Kara Tan Bhala, president and founder of Seven Pillars Institute for Global Finance and Ethics, remarked that sustainability and ethics tend to overlap in certain instances as the goal of a sustainable activity is to make good and avoid harm. This is, by definition, an ethical reason. A sustainable objective, however, also can be achieved in an unethical manner. Similarly, an organization could claim to be advocating sustainability while actually engaging in greenwashing. The cooperation of several players is fundamental to ensuring that the goals of ethics and sustainability are met. Investors, shareholders, and stakeholders should be completely invested in pursuing sustainable goals and reducing carbon emissions. Governments are responsible for making regulations and directing how investors should act. Finally, corporations need to consider stakeholder interests and not focus solely on the concept of shareholder maximization.
Jean-Philippe Desmartin, head of the responsible investment team at Edmond de Rothschild Asset Management, underlined that governance is a prerequisite for every organization when engaging in environmental, social, and governance (ESG) investing. A proper governance system does not automatically ensure good company performance, but poor governance ultimately leads to scarce performance. In addition, to be successful in activities concerning E and S issues, an organization should have effective corporate governance practices in place. This is particularly true in those sectors in which earning investor trust is essential (e.g., the finance industry).
Leire San-Jose, PhD, is associate professor of finance management at the University of the Basque Country in Bilbao, focused on the need to educate the financial industry, and in particular, retail investors on the benefits of embracing sustainability when doing business. This type of education should be provided in the early years of school rather than only at university. Most university students believe that the main purpose of companies is to only make a profit. Young people should learn that businesses have a social purpose, understand how to develop an ethical organization, and recognize the importance of building trust. This type of education ought to continue throughout the life of individuals.
Finance has a great role to play in tackling climate change and flowing capitals towards sustainable investments. Ethics, however, is a fundamental aspect that financial institutions should not neglect. Investor trust in sustainable investments can be built only if financial institutions and businesses develop a strong ethical culture and change the way they do business by not only prioritizing short-term profit but also considering stakeholder interests.
You can watch the webinar here: https://www.ethicsinfinance.org/2020-2021/award-ceremony-8th-edition/
The nominated essays of the 8th edition (2020/21) of the prize can be viewed here: https://www.ethicsinfinance.org/wp-content/uploads/Document/2021-FMC_48-49.pdf
You can watch the video interviews with the laureates of the 8th edition of the prize here: https://www.ethicsinfinance.org/2020-2021/interviews-winners-8th-edition/
Image Credit @ Getty Images Kasper Nymann/ EyeEm