The scandal of Denmark’s largest bank actualizes an agenda of fundamental consequences for the whole finance sector. Adapt to the new ethical and moral norms or expect strong regulation and loss of credibility.
Erik Rasmussen, Publisher, The Sustainian
It can barely be more paradoxical – or troubling. The sector that has the largest impact on society also has the lowest level of credibility – the finance sector. This is what a recent international survey reveals, which ranks the credibility of 15 industry sectors. The finance sector lags considerably behind sectors such as the automotive industry, the food and beverage industry, and the entertainment and fashion industries. But it is no secret that the whole sector has worked hard to achieve this dubious honor.
The reverberations of the global financial crisis – which happened exactly 10 years ago – still shatter, and according to the flow of analyses and reportages that have covered the 10 years’ anniversary, no real culprits were found back then and held responsible for casting the world into a profound and prolonged economic crisis. Denmark’s largest bank, Danske Bank, celebrated the jubilee with the one of the biggest cases of money laundering in history. Worth noting, happening in a country known for its healthy financial systems, transparency and strong stance against corruption. The scandal is of such scope that it will damage the Danish financial sector’s credibility and credit worthiness for years.
What is worse is the fact that there are no clear signs that the sector has learned from the crisis. Regulation might have been tightened up here and there, and banks have become more resilient. That being said, the messages of a variety of recent status reports inform that attitudes, behavior, and culture of the sector are more or less “finance as usual”.
A shady image
It is a cold comfort, but yet another argument for the trust crisis, is that many other banks have been involved in similar scandals as Danske Bank. The Swiss research institute RepRisk, that specializes in ESG business intelligence, has mapped more than 20 of the largest bank scandals during 2006-2016, hereof the infamous “Panama Papers”. In 2017 the scandals continued with among others Deutsche Bank playing a main role. All the while, major financial institutions are emphasising their corporate social responsibility, despite no real comprehensive, visible initiatives ever materialising. On the contrary, the ever-growing billions in profits contribute to the notion that greed is still the most salient driver of the financial sector.
But even though the majority – including most banks – are compliant with the regulatory, as well as ethical norms for credible financial business, they are nonetheless now forced to rethink their role and responsibility in the world of tomorrow.
Thus, the bank sector holds a good deal of responsibility for the dubious reputation capitalism and the free market have gained over the years. The world of finance has become more-or-less synonymous with greed and expanding global inequality, where 1% of the world’s population profiteers from the remaining 99%. Although there are exceptions, and although several sides are putting in efforts to change this perception, it is continuously challenged by new scandals such as the recent one concerning Danske Bank.
Indeed, the finance sector comprises more than banks, it also includes insurance and pension funds, mortgage institutions, a variety of investment companies, venture funds and more. But even though the majority – including most banks – are compliant with the regulatory, as well as ethical norms for credible financial business, they are nonetheless now forced to rethink their role and responsibility in the world of tomorrow. Not only because a group of colleagues have trespassed all current rules of the game, but also because they are facing new demands and new kinds of expectations. What is for instance the ethical and moral difference between pension funds investing billions in weapons and tobacco, or companies that are employing underage workforce or critically underpaid workers, and banks that are laundering money flows? It becomes increasingly difficult to discern, and thus ethics and moral will become the common denominator for a long range of the demands the sector will be facing.
A new reality
The whole sector’s ability and willingness to read the new signals will decide whether it will plummet even further down the credibility ladder, whereby they risk having a harder time attracting the best talent, or face further regulation.
In other words, it will not be about creating the largest surplus and as many billions as possible to shareholders, but rather about creating the largest value for society.
But the signals herald that corporate sustainability will migrate from CSR departments to the executive boards. In other words, it will not be about creating the largest surplus and as many billions as possible to shareholders, but rather about creating the largest value for society. It is also the financial sector’s chance to achieve a degree of credibility that corresponds to its size and impact. Banks as well as other players of the sector – be it pension funds, insurance companies and other institutional investors – are expected to play a key role in the transformation to a more sustainable economy. Here, their social responsibility and ethical norms will be tested. This will challenge their investment strategies to date, not least their assessments of what are, in the long-run, the most sustainable – in reality, profitable – investments.
It will pose a challenge for the institutional investors and pension funds that have allocated large sums of their wealth in fossil fuels, weapon production and tobacco. This is not compatible with any concept of social responsibility, and justifying it by referring to the need for returns and obligations to pension clients does not hold water. Even though it is a legitimate argument, it is also short-sighted, due to the fact that sustainable investments gradually have proved to be fully competitive, even outperforming the “sin stocks”, given that returns are seized over a longer time horizon.
Overall, the financial sector is confronted with the largest and fastest running paradigm and strategy shift ever seen in its history. The paradigm shift will demand the sector to become much more transparent and create a stronger balance between share- and stakeholder obligations. This challenge has been understood by larger parts of the sector through the notion of “divestments”, which expresses how the sector is starting to scale down from investments in a range of sectors, or even withdrawing from them, first and foremost the coal industry. A recent divestment movement has been instrumental in making 1,000 institutional investors commit to divest from US$6 trillion in fossil fuel assets. It sounds like a lot, but it is a relatively small part of each of the investors’ portfolio and it amounts to a little more than 2% of the almost US$300 trillion which is the collected assets of the whole sector.
In this issue of The Sustainian we have identified the future of sustainable investments, based on the conclusions of more than 20 international reports and papers. They confirm the need for a paradigm shift, and that it needs to happen urgently. Partly because of external pressure, and partly because it will become a financial necessity as the sector risks losing billions of dollars from “sin stocks” in fossil fuels if they don’t change investment strategies in due time. It is in fact estimated that the financial sector risks to see staggering US$30 trillion of assets become stranded.
A sustainable capitalism
But the paradigm is about more than just re-prioritizing and scaling down investments in fossil fuels. According to the Better Business, Better World reports initiated by a group of very notable experts and business leaders, we are facing what they characterize as the transition to a long-term thinking capitalism. That means a financial system that supports long-term investments, from businesses and governments, for long-term outcomes. It will imply a general reorientation towards achievements that can only be measured in decades, not in days. Of the means to do so, the report mentions new regulations, the development of new business models, technologies, etc. and expects it to be a tiresome process, among others because the financial sector is very fragmented with thousands of different actors. This kind of transition will most likely entail an “ethical elimination race” in the sector, and the more influential and powerful a financial institution is, the higher the stakeholder expectations will become and the faster and deeper the fall will be, if the new norms are violated.
In other words, understanding that social responsibility is not just a matter of CSR but rather a core business and condition for existence.
This is what Danske Bank is experiencing at the moment. It has become a significant example of how high the price to be paid can be, and how big the consequences of serious neglect can be – not for the bank alone, but the whole sector, for the Danish credit worthiness, and not least the credibility of the capitalist system. To restore trust, it will be crucial that the whole sector gets the message before it stands with its back against the wall. In other words, understanding that social responsibility is not just a matter of CSR but rather a core business and condition for existence.
But if executive boards do not understand the message, the change will only come from one place: the employees and the clients. The case of Danske Bank shows for instance how much influence one single whistleblower has. And you can expect whistleblowers to grow in number, with the risk of a decrease in the number of clients in the institutions that did not read the writing on the wall.
