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FINANCE

How the values that underpin financial institutions impact wider society

How the values that underpin financial institutions impact wider society

By Marten Moller, ESG Lead at Algbra

To have a better impact on society, many of us are switching to more ethical and sustainable options wherever possible. According to PWC, 76% of us are ready to ditch “companies that treat the environment, employees or the community in which they operate poorly.”

While it’s important to nurture sustainable habits, like going vegetarian, stopping flying and switching to renewable energy, we often overlook one of the most impactful options – making our money more ethical. Research by Make My Money Matter shows that greening your pension could be 21x more impactful than all three combined.

Money really does help to make the world go round. How we choose to save, spend and invest today shapes the society of tomorrow. That’s why, in addition to prioritizing their fiduciary obligations, financial institutions must imbue their operations with values that protect and positively impact society and the environment.

Spending

A staggering 72% of global greenhouse gas emissions are caused by household consumption. Thanks to technological advancements, financial institutions can now reduce the impact consumption has on society. This can include enriching a customer’s transaction details by providing them with information about their carbon footprint, or incentivizing their customers’ behavior to choose more eco-friendly and ethical alternatives. In effect, it turns people’s phones into an everyday climate action tool.

Investing

How we invest also impacts broader society. It’s important that financial institutions diversify their portfolios to offer and invest in projects that have a positive triple bottom line – profit, people and planet. After all, demand creates supply. And there’s no shortage in demand. Investors are missing attractive and adequate ESG investment opportunities, and 88% of institutional investors believe asset managers should be proactively developing new ESG products, according to research by PWC.

In short, much more investment in a green transition is needed and in demand. 

Luckily, ESG assets are growing more quickly than their non-ESG equivalents. With a projected compound annual growth rate (CAGR) of 12.9%, ESG assets will make up over 21.5% of global AUM (and over 50% in Europe) in under five years. Crucially, ESG assets tend to outperform their non-ESG counterparts.

Saving

How we save money is equally as important. The money in your bank account doesn’t sit there idly, waiting for you to spend it. Banks actively invest your money – and you usually don’t get a say over what they invest it in.

They could be using your money to fund industries that directly oppose your values, like tobacco, arms, and environmentally harmful practices – like deforestation.

In the five years following the signing of the Paris Climate Agreement, financial institutions made an estimated $1.74 billion in deforestation-adjusted proceeds. Global Witness estimates the total value of deals signed with some of the world’s most harmful deforesters could be worth $157 billion. 

Your financial decisions, active and inactive, impact the society we live in. Money is one of the most powerful tools we have at our disposal and provides us with multiple opportunities to vote on the future we would like to see, every day.

Inclusion

Worldwide, 1.4 billion people are unbanked and lack access to basic and essential services. Moreover, when you expand the definition of access (usually associated with poverty) to include the financially ‘overlooked’, this figure shoots up. 

Because access is a quantified term, devoid of qualitative value; it must be meaningful to the customer, otherwise it’s a gimmick. Millions of people lack meaningful access, and not just in developing countries – there could be around 9 million financially overlooked people in the UK. Characteristics like race, disability, religion, gender, and sexuality impact an individual’s experience with financial services. Not catering to requirements around people’s values, identities and lifestyles can exacerbate social inequalities.

Even the most basic financial technologies can have huge impacts in increasing financial inclusion, especially among disproportionately impacted demographics (like women) and developing economies. MPesa, for example, is said to have conservatively lifted 2% of the Kenyan population out of poverty and increased gender equality. 

They can also help emerging economies leapfrog their Western counterparts and catalyze major social impacts, by serving as stepping stones to providing access to more traditional and impactful financial services, like loans, which can help people build businesses and get on the property market. 

Financial inclusion has been identified as an enabler for 7 of the 17 Sustainable Development Goals.

While the fintech revolution has made dents in the financial access issue (with 1.2 billion adults worldwide getting access to an account between 2011 and 2017), it still hasn’t reached its potential. Like their brick-and-mortar predecessors, fintechs generally offer standardized solutions for assumed homogeneous populations. 

Combining financial technology and AI opens up the ability to greatly improve financial literacy and well-being among customers. It provides them with insightful analytics about their spending and recommendations on how to improve their situation based on personalized data and metrics. 

The Intersection of the Environment and Society

Marginalized communities, both within borders and internationally, are the most impacted by the climate crisis despite contributing the least to it. As we address the climate crisis, it must be done in a manner that enables developing economies to develop simultaneously, a process referred to as a Just Transition. To achieve this, we will need to leapfrog traditional processes of industrialization. That’s why it’s essential for financial institutions to scale and accelerate investment in green projects, such as infrastructural developments like renewable energies in developing economies. 

Not doing so will only exacerbate existing inequalities. Without a green transition, the World Bank believes climate change could push 100 million people back into poverty by 2030. That’s only 7 years away. It could drive 216 million people to migrate within their own country by 2050 and create hotspots of internal migration as soon as 2030. Things will only get worse from there. Over 1.3 billion people (mostly in developing countries) are trapped on agricultural land that’s degrading. This increases their vulnerability to slow-onset disasters, like drought, desertification, food insecurity, and famine. This is scary when you consider that 70% of the world’s poorest depend on natural resources for all (or part) of their livelihoods. Climate change impacts could cause 600 million more people to face food insecurity and malnutrition as agricultural systems collapse.

As if the human cost wasn’t enough, the monetary impact of climate change is staggering. Global natural disaster losses in 2022 alone totaled $270 billion. If financial institutions continue their business-as-usual approach and ignore the implications of their investments, it’ll end up costing the world’s economy $178 trillion by 2070.

By 2100, global GDP could be 37% lower than it would be without the impact of global warming (when accounting for the effects of climate change on economic growth).

Opportunity

To make the global green transition, spending on physical assets would amount to about $275 trillion between 2021 and 2050. That’s about 7.5% of annual GDP (on average), with the vast majority coming from the private sector.

Investing in a green and equitable society is never money down the drain. A $1 investment in a green economy returns, on average, $4 in benefits. So in addition to developing societies, improving the environment and creating jobs, it offers a good return. Put simply; green banking pays back in more ways than one.

Creating a more financially inclusive society could also have a major impact on global GDP. A study by EY showed that increasing financial inclusion can drive economic development, and possibly increase GDP by up to 14% in emerging markets like India and a staggering 30% in frontier economies like Kenya.

Increasing financial literacy will also help empower individuals and communities. It’s a mammoth task with lots of opportunities when you consider only 33% of the global population can be considered financially literate.

The structure of financial products and services

Even the very nature of how a financial institution’s products are structured and sold can have a big impact on the lives of individuals, and consequently, society. For example, opting for fixed rates as an alternative to interest rates can help individuals plan better and avoid nasty surprises when economic factors outside of their control ramp up their debt.

Risk/reward sharing on loan products, like mortgages, can also have a big impact. If banks know they have something to lose by providing loans to individuals they expect to default on, they would stop, as it would be bad for business. This sort of structuring may have prevented the global 2008 financial crisis, which was heavily linked to predatory lending that targeted low-income homebuyers.

Ultimately, a lot of this is at the discretion of institutions. They have the possibility to provide fairer, more transparent, and responsible products and services. But only if they’re willing to forego exploitative practices in the hopes of achieving excessive profits at the expense of their customers. 

Conclusion

Finance is the engine of society and at the heart of every individual’s life experience. A more equitable, empowered, and sustainable society starts by imbuing these values at the root of everything; money.

Financial institutions have a unique position and opportunity to help address some of the world’s most pressing humanitarian and environmental challenges and to create a better future for all. The ways in which this can be achieved are extensive and go beyond the confines of this article.

And it can all start with you. Go and green your finances and campaign to get others and financial institutions themselves to do the same. 

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