In finance we trust

By Pratik Desai, World Benchmarking Alliance (WBA)

The recently released 2021 Edelman Trust Barometer startlingly reveals that business is the only trusted institution. And yet, the financial sector remains the lowest trusted sector for the tenth year in a row. Pratik Desai provides an insight into WBA’s recent report, which lays the groundwork for a new benchmark to assess financial institutions on their performance towards the SDGs.

With a raging global pandemic, a continuing climate emergency, and widespread unrest, it is clear the current economic and social order is in deep crisis. These issues have been exacerbated by widening inequality and threats to democratic norms that have resulted in a remarkable breakdown of trust in the institutions that govern our world. We now face an unprecedented opportunity to reset and reimagine what is possible, with business playing a leading role.

Indeed, business has never been better positioned to rise to the occasion. The recently released 2021 Edelman Trust Barometer startlingly reveals that business is the only trusted institution. And yet, the financial sector remains the lowest trusted sector for the tenth year in a row.

This is a serious challenge that the financial sector must address. In the context of the Sustainable Development Goals (SDGs), this means providing clarity on how financial institutions can mobilise, reorient, and align the capital needed to achieve systemic impact on the issues that matter most. That’s why the World Benchmarking Alliance (WBA) is developing a benchmark that will assess and rank the world’s 400 most influential financial institutions on their performance and ability to positively contribute to the SDGs.

Last month, WBA released a Scoping Report that lays out our initial thinking and intended direction of travel for the benchmark. The Scoping Report is the result of months of consultation with stakeholder groups from across the financial system. Here is what we found.

Aligning practices with global goals

While there are many reasons for the trust deficit between individuals and the financial system, societal expectations are evolving rapidly. And while we are seeing positive signs of change with the rise in impact investing and ESG considerations, these efforts are often geared towards impact at the individual firm or portfolio, rather than the system, level. They lack convergence and often focus on definitions of sustainability that are not in line with globally agreed-upon goals and standards, such as the SDGs, the Paris Agreement, and the UN Guiding Principles on Business and Human Rights. To meet these goals, financial institutions must align their practices and disclose accordingly, reporting in a way that is consistent and comparable. The benchmark could help to accelerate this shift and provide accountability for progress.

Systemic risk to financial institutions, and people and planet

For too long, the financial system’s ability to positively contribute to sustainable development has been hamstrung by a narrow focus on short-term profit, compounded by definitions of materiality that solely focus on the impact of social or environmental factors on financial value. This renders action in line with a longer-term, systemic view of risk near impossible. While this is a serious challenge, progress is underway – particularly in the European Union, where regulators are tackling the concept of dynamic materiality. This perspective suggests that issues that are material to society and environment – like climate change or a global pandemic – can rapidly become financially material. Climate change, in particular, is increasingly recognized by regulators as posing systemic risk to the financial sector, with reports outlining these risks coming from institutions such as the United States Federal Reserve and the Bank of India in recent months. Rapid biodiversity loss is also increasingly under scrutiny.

These signals demonstrate that a failure to meet globally accepted goals and standards is deeply connected to systemic risk, posing existential threats to people, planet, and the financial system itself. The benchmark should accurately reflect this, seeking to incentivize practical actions by the financial institutions in scope.

Bridging regional divides for global impact

While the SDGs are a universal agenda, the impacts of failing to achieve them will be most severely felt in the global south. Global assets are concentrated in the global north, which also dominates capital flows. Less than 4% of capital currently flows to middle-income countries (excluding China), which comprise 50% of the world’s countries, compared to the more than 80% of capital flowing to high-income countries. Capital flows to low-income countries are negligible. And while the profits from these capital flows are concentrated in the global north, their impacts are felt globally.

This is why the benchmark proposes to focus on the financial institutions that have a disproportionate influence on these capital flows. These institutions are exposed to global markets and the systemic risks outlined above, but also have influence on them. The benchmark could help to incentivise disclosure of progress against SDGs, highlighting leadership and accelerating further progress to drive impact for those most in need.

Seeking collaboration and complementarity in approach

The corporate sustainability and responsible investing space is busy, with new initiatives constantly emerging. Consider climate, for example. Just one year ago, no financial institution had made a net zero commitment, yet today, a growing number of financial institutions have made such commitments. Despite these developments, our proposed benchmark aims to fill existing gaps in the system by being free and publicly accessible, focusing on drivers of transformative action at the systemic level, and amplifying and aligning existing initiatives.

This focus on collaboration and alignment is at the heart of WBA’s global, multi-stakeholder Alliance of over 200 organisations, including reporting frameworks and platforms, standards-setters, and existing benchmarks and indices.

The path forward

This Scoping Report marks the first milestone towards the development of WBA’s Financial System Benchmark. As we prepare to embark on the methodology development process throughout 2021, we would love your feedback on the contents of the Scoping Report.

As we begin to emerge from the darkness of COVID-19, re-establishing trust in our institutions will be more important than ever. The financial sector has an opportunity to step up and lead in the recovery, rebuild, and race to achievement of the SDGs. Let’s not squander our chance.

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