The debate about regulatory versus voluntary reporting that should be required of financial institutions is very much alive. This is one of the messages coming out of the Transparency and Accountability in the Financial Sector study done by the the international civil society network Fair Finance Guide International (FFG).
The report, launched last summer, examined key aspects relating to transparency and accountability, and to reporting about tax related issues, as they apply to 47 banks in seven countries (Belgium, Brazil, France, Indonesia, Japan, the Netherlands and Sweden), and includes case studies on others.
In addition to the levels of tax transparency (see previous RightingFinance blog), a good part of FFG’s methodology concerns transparency of the examined banks in the area of economic and social risks. One of the common features that emerge in all countries that were covered by the study is summed up by the report as “the debate around the merits and the limitations of voluntary reporting by the financial industry, and what kind of regulatory, that is obligatory, disclosure and reporting should be required of financial institutions when voluntary reporting is insufficient.”
For instance, in Brazil, the Brazilian Bank Federation has its own Self-Regulation System which developed a framework in 2014 for the development and implementation of a socio-environmental responsibility policy by its members. The Brazilian Stock Exchange developed a questionnaire-based Corporate Sustainability Index which is now in its tenth year, with a portfolio composed of 40 companies drawn from 19 sectors, including some of Brazil’s largest banks. Yet, one of the conclusions in the respective chapter is that for both state-owned and private Brazilian banks suffer of “opacity, mainly on the social and environmental aspects of financed projects, corporations and equity investments.”
Looking at the case of Belgium, the FFG states that “Self-regulation may be helpful, but only legally binding regulations are able to enforce minimum norms with regards to non-financial reporting for the financial industry as a whole.”
FFG’s analysis included whether banks published: their responsible investment and finance policy as part of their so-called Environmental Social Risk Management System (ESRMS); names of companies and governments invested in, including names of all current and recently closed project finance deals and project related corporate finance deals; names and number of companies the bank had interactions with on social and environmental topics, including the results of that engagement and their consultation with civil society organisations and other stakeholders.
According to the Fair Finance Guide, “Consumers and citizens are keen to know what consequences business activities can have for their life and which risks they are exposed to. Companies should therefore be fully transparent, allowing individuals to inform themselves. Moreover, companies should be prepared to be accountable for their activities and to listen to the expectations and concerns of other stakeholders.”
It is, thus, a welcome break from other reporting initiatives that the study not only offers scrutiny of the standards observed by banks, but it also assesses their usefulness in satisfying the concerns of that public in a useful manner. For instance, it observes that not all banks that claim to report on social and environmental risks have their reports verified externally, and those that claim to do so may be actually misleading in terms of the scope of such verification. Another example relates to the Equator Principles. This well-known set of principles several banks apply for projects they finance, FFG observes, could be fulfilled with an overview of the deals and a breakdown according to the results of the risk analysis, without need to give the names of the projects.
A case study on the situation in the United States that I contributed to the report concludes that given the limitations of regulatory requirements to disclose environmental, social and human rights risks, it is not surprising that disclosure boils down to a patchwork of voluntary initiatives that are highly uneven and discretional. This can be exemplified with the behavior of the largest banks, such as Bank of America, JP Morgan, Citibank and Goldman Sachs, which do not refrain from making claims of their sensitivity to environmental and social risks and, yet, in the best cases have relatively vague policies on environmental and/or social risks the implementation of which is audited internally. In addition to the lax monitoring of such initiatives, some of them are of a best-endeavor nature (e.g., subscribing companies are only required to show they are committed to implementation, not necessarily implementing them already) and of limited coverage to bank operations.
In fact, transparency requirements for the banking sector in the US, even after the financial legislation overhaul post-2008 crisis, are very much driven by the goals of financial stability and prevention of systemic risk. This explains why regulations fail to address transparency on environmental, social, or human rights concerns affecting the activities of the banking sector.
“The aim of Fair Finance Guide is to promote a race to the top among financial institutions in their policies and practices,” said Imad Sabi, the Methodology and Research Coordinator in FFG. “We want this report on transparency and accountability to highlight where banks are and to set demands and expectations in this regard.”