Academic journal article Journal of International Business Ethics

Accountability and Transparency in the Financial Services Sector: Advancing Sustainable Finance

Academic journal article Journal of International Business Ethics

Accountability and Transparency in the Financial Services Sector: Advancing Sustainable Finance

Article excerpt

The Prevailing Framework for Reporting Guidelines Is Not Relevant to Significant Aspects of the Financial Services Sector

While the prevailing framework for accountability and disclosure of corporate environmental and social performance has accomplished substantial heavy lifting with respect to defining and adopting global corporate social responsibility ("CSR") core and performance indicators, boundaries, and reporting initiatives \ such framework has been only moderately successful in addressing the sustainability reporting guidelines and parameters for the financial services sector. This is true, notwithstanding that the critical global financial services segment substantially influences both directly and indirectly the flow of capital to green 2 and other decisively important financial markets. Heretofore, it appears that the sustainability community has failed to appropriately reflect an important aspect of how the global financial system interacts: i.e. the extent to which rogue opportunism by major capital markets players can undermine a sustainable financial system and the concomitant imperative for long-term economic, social, and environmental value.

Existing CSR reporting and disclosure guidelines ignore the fact that a major subdivision of the financial services sector, the global commercial and investment banks ("big banks"), have had a disproportionately negative influence on nearly all of the financial crises experienced during the past 15 years. Many would argue that it was misbehavior on the part of the big banks that caused these crises - crises that have bled the world markets to the tune of many billions, if not trillions, in capital that could, otherwise, have been deployed far more constructively for the benefit of global society. This includes a significant portion that could have been allocated for sustainable financial products. In particular, ill-contrived, structured finance schemes engineered by a number of global banks have been intrinsic to major financial fiascoes, wealth asymmetries and financial dysfunctions that have pervaded the global economy. Examples of cataclysmic market disruptions, where the big banks played seminal roles, include, among others, the Enron debacle, the subprime financial crisis, and the European debt disaster.3 Clearly, certain members of the global banking community have been recalcitrant bad actors and, as widely reported, have lined the pockets of their excessively paid and short-term incented top management while taking actions that have been starkly inimical to the interests of the world economic community at large.

Among other things, the largest global banks have been and continue to be deeply into derivatives and other complex financial instruments that often derive their value from obscure, enigmatic structured finance assets that are extremely difficult to value. In the recent past, many of these financial institutions have made (and continue to make) outsized bets on whether or not particular financial instruments or entities (which are often poorly defined and difficult to value) would default during specified time periods.4 Similar bets have been made regarding derivative instruments based on pure speculation rather than legitimate business hedging strategies. Big banks, with access to insider information and by virtue of the enormous resources they control, can manipulate market and information asymmetries to their unique benefit. Such zero-sum "gaming of the system" means that arm's-length investors - including pension funds and institutional investors - are often materially shortchanged. Notwithstanding the enormous systemic risks that such well-documented, high-stakes, financial gambling engenders, the existing CSR framework, including the Global Reporting Initiatives' Sustainability Reporting Guidelines for the Financial Services Sector ("Financial Services Sector Guidelines," or "Guidelines")5 does nothing to address the inherent corporate irresponsibility that such activities may reflect. …

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