6th October 2020 0 Comments Purpose

How can finance become stakeholder led?

From a shareholder to a stakeholder model

Last month marked fifty years since Milton Friedman’s seminal article was published in the New York Times. On September 13th 1970, the economist provocatively argued that the sole purpose of an organisation was to maximise profits. This was business’ only social responsibility.

Whilst Friedman made reference to the “long-run interest of a corporation”, his model of capitalism essentially emphasised short-term success, benefiting shareholders. Companies “can do good”, he added, “but only at their own expense.”

Friedman’s shareholder-oriented model of capitalism had immense influence on a generation of executives and political leaders. Yet in the past two decades, there has been an increasing drive for change in the prevailing corporate governance model.

According to the World Economic Forum, rapid advances in technology coupled with unprecedented socioeconomic and environmental change, “is eroding the traditional distinction between a shareholder-primacy model (which focuses on financial and operational costs and benefits) and a stakeholder-driven model (focused on environmental and social risks and opportunities).” 

As such, the World Economic Forum has called for business to embrace stakeholder capitalism, which, as Klaus Schwab, Founder and Executive Chairman of the WEF explicates, “means not only maximizing profits, but […] actively contribut[ing] to a more cohesive and sustainable world.”

This means that issues that would have previously been of secondary interest for CEOs and boards, such as global threats like climate change, are now regarded as inseparable from the economic value of these enterprises.

The United Nations and Sustainable Banking

The United Nations Environment Programme Finance Initiative (UNEP FI) represents the financial industry’s alliance with the United Nations. It brings together banks committed to using their activity to positively impact people and planet.

Last year, UNEP FI  launched their ‘Principles for Responsible Banking’. Initially signed by over 130 banks, the agreement represented a commitment to the goals from the 2030 Agenda for Sustainable Development and the Paris Agreement on Climate Change. 

With the overarching goal of accelerating sustainable finance, the signatories aimed to facilitate collaboration between banking, insurance and investment industries, technical experts and key stakeholders. Working together, they set out to amplify the voice of the finance sector in policy debate and maximise the impact of collective action. 

What was achieved in the first year?

Within a year, UNEP FI’s ‘Principles for Responsible Banking’ has already been signed by nearly 200 banks, representing around 40% of the banking industry.

The collective impact of this collaboration has been particularly evident throughout the pandemic. If the current crisis has shown us anything, it is that it is not true, as Friedman suggested, that doing good and doing well are mutually exclusive. 

Guided by the Principles, signatories have been well-positioned to support both each other and their clients and communities throughout the crisis. Banks have been integral in amplifying government response programs and working in partnership with stakeholder groups, particularly to serve the needs of the most vulnerable. 

“More and more banks […] are understanding that their long term success is indeed understanding that society’s success goes along with it”, says Inger Andersen, UNEP Executive director (Switzerland). 

In the first year, signatories focused on creating the strategy, policies, training and accountability mechanisms needed to embed the Principles across their companies. 11 working groups were set up, enabling individuals and organisations to learn from each other, with the goal of advancing six key areas. 

One of the first achievements of these working groups has been the launch of the portfolio impact assessment tool, enabling banks to understand and respond to their key impacts.

The Signatories also agreed to set up the Civil Society Advisory Body. Bringing together twelve organisations from every region around the globe, the body combines expertise in the most relevant social and environmental issues in order to monitor collective progress.

These new developments have created robust accountability mechanisms, ensuring that the necessary change for people and planet will be brought about.

“I truly believe that the next 30 years of our economy, of our society, can’t be like the last 30 years,” states Guy Cormier CEO of Desjardins Group (Canada)

What are they planning to do next?

In the coming year, the banks intend to go further with the progress they have already made. This will include setting targets and establishing milestones, formally reporting on principles and assessing the collective success of principles so far.

“When every bank employee and every bank around the world understands how their decisions affects society, affects the environment, and makes their decisions accordingly, does their work accordingly, interacts with clients accordingly, that’s the moment we’ve succeeded,” says Simone Detting, Baking Team Lead UNEP FI, Switzerland.

2019 and beyond

Celebrating the first anniversary of the principles, we spoke with signatories around the globe to create a film sharing their insights and learnings on the changes and tools they brought to sustainable banking amidst a pandemic.

After a tumultuous year, their perspectives are exemplary stories of community, collaboration and hope.