Electronic copy available at: http://ssrn.com/abstract=2653595

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The Role of Financial Institutions in Advancing Responsible Value Chains

Insights from a Dialogue Series with Dutch Financial Institutions

Herman Mulder

DUISENBERG STRATEGY SERIES No. 201503

Electronic copy available at: http://ssrn.com/abstract=2653595

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About the author

Herman Mulder is Executive Fellow at Duisenberg School of Finance, an independent member of the Dutch NCP, Chairman of the Board True Price Foundation, former Chairman of the Board Global Reporting Initiative (GRI), former Director-General Group Risk at ABN AMRO Bank, co-initiator of the Equator Principles, and a Worldconnector.

Special thanks to Bernd Jan Sikken, Director Business, Research & Innovation at Duisenberg school of finance, for providing valuable feedback to earlier versions of this discussion paper.

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No part of this publication may be reproduced or transmitted in any form or by any means, including photocopying and recording, or by any information storage and retrieval system without prior consent of Duisenberg school of finance. Cover images © Fotolia.

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Table of Contents

Section 1: Introduction ....................................................................................................... 4

1.1 The dialogue ................................................................................................................ 4

1.2 Value chain definition of the financial sector ................................................................ 4

1.3 Broad financial sector participation in the dialogue ...................................................... 4

1.4 Content ........................................................................................................................ 4

Section 2: Summary & recommendations ......................................................................... 5

2.1 The business case for responsible business conduct .................................................. 5

2.2 Momentum and opportunity ......................................................................................... 5

2.3 Trust and credit............................................................................................................ 5

2.4 Financial system resilience .......................................................................................... 6

2.5 Recommendations ....................................................................................................... 6

2.6 Special note ................................................................................................................. 8

Section 3: The emerging context - transformative momentum ...................................... 8

3.1 Scaling up, speeding up .............................................................................................. 8

3.2 The international policy agenda ................................................................................... 9

3.3 The Dutch policy agenda ........................................................................................... 10

3.4 Ambition .................................................................................................................... 10

Section 4: Creating value by an ambitious, responsive and responsible financial sector ................................................................................................................................. 11

4.1 Risk management ...................................................................................................... 11

4.2 The need for integrated thinking ................................................................................ 11

4.3 Societal risk analysis ................................................................................................. 12

4.4 Oiling the wheels ....................................................................................................... 12

4.5 Externalities ............................................................................................................... 12

4.6 Show me the value .................................................................................................... 13

4.7 New corporate boundaries ......................................................................................... 13

4.8 Leverage ................................................................................................................... 14

4.9 Materiality .................................................................................................................. 14

4.10 Confidentiality versus accountability ........................................................................ 14

4.11 Leadership ............................................................................................................... 14

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Section 5: The FI sector must do the heavy-lifting itself ................................................ 15

5.1 Integration ................................................................................................................. 15

5.2 Data quality ............................................................................................................... 15

5.3 Disclosure and self-confidence .................................................................................. 15

5.4 Explicit adoption of the MNE-GLs .............................................................................. 15

5.5 Due diligence strengthened ....................................................................................... 16

5.6 Making the financial instutions better fit for tomorrow................................................. 16

5.7 Making costumers better fit for tomorrow's challenges and oppurtunities ................... 17

5.8 Making markets better fit for purpose ......................................................................... 17

5.9 Tone from the top ...................................................................................................... 17

5.10 Access to remedy .................................................................................................... 17

Section 6: The FI sector cannot do it alone: the role of government ............................ 17

6.1 Enabling environment ................................................................................................ 17

6.2 Coherence ................................................................................................................. 17

6.3 Current regulations and codes are not sufficiently compatible ................................... 18

6.4 Precompetitive consultation within the financial sector............................................... 18

6.5 Precompetitive consultation of the FI sector .............................................................. 18

6.6 Governance ............................................................................................................... 18

Section 7: The FI sector cannot do it alone: the role of society .................................... 19

7.1 Media and civil society organisations ......................................................................... 19

7.2 Knowing & showing ................................................................................................... 19

7.3 Do not disengage ...................................................................................................... 19

7.4 Structured dialogues ................................................................................................. 19

7.5 Education and ongoing training ................................................................................. 20

Section 8: Conclusions and further steps ....................................................................... 20

8.1 Extented due diligence is essential ............................................................................ 20

8.2 Putting the recommendations into practice ................................................................ 20

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1. INTRODUCTION

1.1 The dialogue: this paper is a reflection of a six-month dialogue series on the role of financial

institutions in advancing responsible value chains. This dialogues series was hosted by Duisenberg

school of finance (DSF) and led by the author. The dialogue was initiated to share emerging business

practices among leading corporations, financial institutions as well as increasing expectations from

the public domain, both nationally and internationally, thus warranting further dialogue and guidance.

1.2 Value chain definition of the financial sector: all activities that a financial institution carries out

to create positive value for its customers (including its investees) and other stakeholders, as well as

those activities that mitigate or reduce any “adverse impacts”, as defined by the OECD Guidelines for

Multinational Enterprises, by such customers and investees.

1.3 Broad financial sector participation in the dialogue: the paper has greatly benefitted from the

active engagement and inputs during the dialogue from ABN AMRO, Achmea, Aegon, APG, DNB

(Dutch Central Bank), FMO, ING, Dutch Ministry of Finance, NN Group , NVB (Dutch Bankers’

Association), PGGM and Rabobank.

The participants from these banks, asset management firms and insurance companies were mostly

from the ESG or strategy functions, but the dialogue group also included some participants from the

client-facing business function, as well as staff members from the supervisory institution and the

government.

1.4 Content: although there was broad consensus on most of the issues addressed in the paper, the

opinions expressed and recommendations made are primarily those from the author and do not

necessarily represent those from individual participants or their organisations.

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2. SUMMARY & RECOMMENDATIONS

2.1 The business case for responsible business conduct: in this paper the author suggests that

responsible business conduct (RBC) by financial institutions extends into their entire value chain, in

line with the 2011 Update of the OECD Guidelines for Multinational Enterprises (MNE-GLs). These

MNE-GLs incorporate the UN Guiding Principles for Human Rights and the relevant ILO Declarations.

Enhanced due diligence, effective leverage and responsive public accountability are not only a social

responsibility, but also a business case because it should create, as a shared view of the participants

to the dialogue, long term value for all shareholders, customers, other stakeholders and society at

large.

2.2 Momentum and opportunity: international and national policy developments are important

driving factors for the business sector as the year 2015 is offering momentum and opportunity for

business in general to define its role therein. In particular the financial sector may have a role as

“enabler” due to its key role in the economy and its customers’ funding operations.

Key drivers in this context are the formulation and implementation of the Post-2015 Agenda on the

Sustainable Development Goals (SDGs) in September by the General Assembly of the United

Nations, and on climate change through COP21, the UN Climate Conference in December in Paris.

2.3 Trust and credit: this paper proposes some follow-up initiatives for the financial sector at large

and its individual members. In general, the financial sector may give itself more credit for, but also

assume more responsibility for the potential, authoritative value -preserving and -creating leverage it

has with its customers and investees.

For further improvement the sector may benefit from constructive engagement and input from civil

society organisations. The Dutch financial sector is internationally recognised for its contributions to

better standards for responsible business conduct.

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2.4 Financial system resilience: the financial crisis has illustrated the importance of the financial

sector for the economy and society. The financial system resilience can be defined as the capacity to

continuously perform the primary functions, in particular supporting the real economy and enhancing

societal wellbeing. The ambition of this paper is also to contribute to the thinking and practicing

towards such resiliency.

2.5 Recommendations:

a) Strengthen due diligence & leverage: financial institutions have the opportunity and responsibility

to use their due diligence and leverage, whether alone or collectively, to stimulate more

responsible business practices in their entire value chain, including the value chains of their

clients. Their added value includes balancing risks and supporting value creation for all relevant

stakeholders and society at large. Due diligence of the value chain is at the centre, and this is not

just a defensive approach. Next to risk management, it is also becoming a tool for identifying

business opportunities, not only for the financial institution itself, but also for their (small, medium

and large) business customers and investees.

b) Adopt the MNE-GLs as baseline standard: by adopting the OECD Guidelines for Multinational

Enterprise as baseline guidance in its customer business (including capital mobilisation and

advisory services) the sector would be instrumental to the building of a broad-based, multi-

stakeholder framework (as also aspired in the Post-2015 SDG Goals) for responsible business

conduct, thereby also contributing to a more level playing field for itself and its customers and

investees.

c) Show ambition: the 2015/2016 national and international policy agendas offer a great opportunity

to put the ambition of a revitalised, innovative, responsive and responsible financial sector into

practice and in the public domain. Financing is at the centre of realising sustainable development,

as reflected in the Finance for Development Summit (FFD3), which was recently concluded in

Addis Ababa.

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d) Integrate new approaches, business models, processes and tools: in a world which is increasingly

dynamic, inclusive, transparent, rights’ sensitive and resource constrained, it is prudent practice to

significantly improve initial and ongoing due diligence with clients, investments and other

transactions. Further integration of responsible business conduct (RBC) into the main risk

management and business generating processes has become an imperative for resilience and

success. This integration also offers the space for innovation, such as the development of new

tools, as well as business models and practices.

e) Better read of the emerging context: frequent engagement on societal and strategic issues with

clients, civil society organisations, governments, supervisors, and academics may be intensified.

Within the Netherlands, the recently started 2015-2017 Sector Covenant Process, initiated by the

government, offers a platform for this in thirteen parallel sectoral processes, including the

financial sector itself with three sub-trajectories: banks, pension funds, insurance companies. The

author suggests that some involvement of the financial sector in the other 12 sector processes

would create value for the other sectors as well.

f) Create an enabling policy framework: government and supervisors may provide more coherent,

forward-looking policies and regulatory frameworks, which are conducive to a proactive financial

sector that meets not only stakeholders’ interests but also general society’s priorities. A review of

prevailing regulations and policies may be made jointly with the sector against this perspective.

g) Recognise that Responsible Business Conduct (RBC) is a journey, and you cannot walk alone:

civil society organisations are encouraged to recognise RBC by business as a journey which

requires trust (or at least “benefit of the doubt”), time, cooperation, balanced solutions (of which

such organisations sometimes do not agree amongst themselves) and accountability. Such

organisations should be prepared to constructively cooperate with the financial sector on key

issues on the basis of “knowing & showing”, recognising that legacy issues and incidental “pain”

often offer an opportunity for systemic “gain” for everyone.

h) Also, universities are encouraged to more actively include the RBC perspectives and issues

discussed in this paper into their curriculums.

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h) Warrant and continue a pre-competitive dialogue: it is recommended that a financial sector

dialogue continues. While the participants to this dialogue are already involved in, and even

leading many different existing platforms and conversations, more pre-competitive cooperation

and streamlining seem to be warranted in order to further prioritise and pool resources.

2.6 Special note: many of these recommendations reflect already existing or emerging practices and

aspirations from the participants to the dialogue. Putting these into generally applied internal priority

and practice is often still challenging.

The strategic importance was recognised by all participants to the dialogue. Further internal

conversations on direction, specific resources and engagement, as reflected in this paper, would

further clarify and articulate the priorities for follow-up.

3. THE EMERGING CONTEXT - TRANSFORMATIVE MOMENTUM

3.1 Scaling up, speeding up: the ESG/CSR agenda has evolved during the last 10-15 years through

a voluntary play by leading practitioners on codes/frameworks like the Equator Principles, UN Global

Compact, PRI (Principles for Responsible Investment), GRI (Global Reporting Initiative), ISO26000;

these were all initiated and launched in the period 2000-2006.

We have now entered into a new stage of development, with governments taking a more active and

normative role. A more shared agenda, co-created by governments, business and civil society

organisations, is setting the stage for soft law based on emerging good practice. Advanced business

would support such trend, as it facilitates the scaling up for a level playing field.

The 2011 Update of the MNE-GLs, as a baseline framework for corporate behaviour, is a prime

example of this, as there was active involvement of the business sector in the development of these

guidelines. The update has been co-created and, hence, has a certain degree of shared responsibility

from BIAC (Business and Industry Advisory Committee to the OECD), TUAC (Trade Union Advisory

Committee to the OECD) and OECD Watch (NGO platform to the OECD3 ).

3 The OECD Guidelines for Multinational Enterprises are being adhered to by the 34 members of the OECD, but also by 12 non-members (including, for example, Brazil).

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Another example is the 2013-launched GRI-G4 reporting framework on corporate disclosure, as it has

become recognised in many countries as a standard for sustainability/non-financial reporting by

business, and as such recognised in the MNE-GLs and the 2014 EU Non-Financial Reporting

Directive.

Setting standards and mainstreaming with government support is accelerating, and documents of

sector initiatives are increasingly linked with the generally accepted standards (for example, the Thun

Group with the UN Guiding Principles on Business & Human Rights, and the recent APG/PGGM

initiative with the MNE-GLs).

3.2 The international policy agenda is creating very promising confluence and momentum for a

progressive business movement towards increased focus on global value chains, public-private sector

partnerships, responsible business conduct (RBC), and looking “beyond GDP/financial capital”.

In addition, this momentum is occurring within the context of a shared ambition for more sustainable,

inclusive, global economic growth and societal stability. Through focus on “sustainabilising” (for

environmental issues) and stabilising (for social issues), the value chains are rapidly becoming a

shared business and societal interest. Recent 2015 and key future events to note are:

the OECD Ministerial Council Meeting (MCM), in June 2015 , chaired by the Netherlands;

the G7 Summit in June 2015; chaired by Germany; a possible follow up may be at the G20 Summit in November 2015, chaired by Turkey;

the UN Finance for Development Conference (FFD3), in July 2015 in Addis Ababa;

the adoption of the UN Post-2015 (universal) SDGs in September 2015 in New York;

the COP21 on climate change in December 2015 in Paris.

The moral underpinning of the agenda was recently emphasized by the Papal Encyclical “Laudato si”

on, inter alia, the environment and climate change.

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Also, the broadening of the interest to establish global responsible business conduct standards was

illustrated by China’s recently growing interest in learning from, and even associating itself with the

MNE-GLs, (at least for its international business), making these (in due time) more globally

recognised.

The ProActive Agenda for the Financial Sector under the MNE-GLs is being defined. In 2016 the

OECD will recalibrate ODA, as well as review the recognition of new (innovative) instruments as part

of the Total Official Support for Development (TOSD), such as development-impact related partial risk

guarantees. Some large philanthropic organisations are also increasingly focusing on the SDGs.

3.3 The Dutch policy agenda: some promising policy initiatives are taking place, specifically:

the start of the 2015-2017 Sector Covenant Process by the 13 prioritised sectors, which is led by business with active civil society involvement, and with a specific trajectory for financial sector ;

the preparation of an ambitious, broad-based Dutch SDG strategy by a coalition of business and civil society organisations (Worldconnectors, DSM, True Price, with support from the Dutch Ministry for Foreign Affairs) for the Dutch national and international value chains;

the legislation of the EU Directive on non-financial reporting into law;

the Dutch EU presidency in the first half of 2016.

3.4 Ambition: this policy context offers the Dutch financial sector an opportunity in 2015 and 2016 to

domestically lead, as well as reinforce its progressive role in international policy and encourage

national and international value chain practices towards an ambitious, more responsive and

responsible role of the financial institutions in society. In doing so, the sector can create value not only

for its stakeholders, but also for society at large.

It has been said: “Nothing is impossible, particularly when it is inevitable.” This is an opportunity to

lead with ambition and for the financial sector in particular.

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4. CREATING VALUE BY AN AMBITIOUS, RESPONSIVE AND RESPONSIBLE FINANCIAL SECTOR

4.1 Risk management at the core: in a smaller, increasingly dynamic, “flat” and stormy world,

“forward-looking, integrated thinking, practicing and reporting” should be at the core of micro- and

macro-prudential risk management by the financial institutions and their customers, investees,

insureds. Risk management is about taking informed decisions and carefully considering all that we

need to know, notably the not so obvious or ignored externalities of today and the variables and

scenarios of an uncertain tomorrow.

Risk management is also quite relevant in order to prudently time-match assets with liabilities,

particularly when it concerns long term and illiquid exposures, which may become potentially value-

impaired or even stranded.

Strengthening in-house risk analysis and risk management capabilities is of the essence and should

serve as an “insurance premium” against major risk-losses. We seem to always have the wisdom to

explain with the benefit of hindsight why a crisis, a failure or an incurred loss was foreseeable and

even preventable, yet we often lack the foresight or the preparedness to take the collective, corrective

early steps needed, notwithstanding hearing “the canaries in the coalmine”.

4.2 The need for integrated thinking: “integrated” relates to four inter-related dimensions:

forward-looking thinking with advanced due diligence: risk-based, societal context- and impact sensitive, rights’ compatible, initial & ongoing. It should explicitly consider, next to the traditional economic and financial capital, also natural, human, social, intellectual and manufacturing capitals;

in the entire value chain (“cradle-to-cradle”); a transition from “know your client” to “know your client and your client’s value chain”;

evaluating and balancing multi-stakeholder interests: impacts & benefits, including today’s society and those for future generations;

“materiality-based” public disclosure and integrated reporting thereon (on the basis of the principle “report or explain why not”).

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4.3 Societal risk analysis: operating in the public domain is an increasingly difficult pathway for

business. As society is becoming more intrusive on the business performance and impacts on others,

a new risk category may be considered and organised: “societal risk”. Such risk may be differentiated

from more traditional risk categories, such as credit (including political) and operational (including

reputation) risks. This approach underlines the need for proactive, enhanced initial and ongoing due

diligence on impacts which financial institutions directly or indirectly (through their value chains) make

in a dynamic and transparent society.

Functions such as reputation management, public affairs and issue management tend to be more

defensive, re-active and ad hoc, while societal risk management is more forward-looking and strategic

by active societal engagement, learning, evaluating and capturing sector-, client- and transaction-

specific exogenous issues. Some of the participating financial institutions have recognised this

approach. Early identification of potential value impairments or stranded assets may be outcomes of

such a structured risk (scenarios) approach.

4.4 “Oiling the wheels”: this relates to the special role for the FI-sector to “oil the economic wheels”,

setting an example in its core values, comprehensive policies, responsible practices, accountability by

its (materiality-based) integrated reporting, and by using its individual and collective leverage towards

responsible, sustainable and inclusive development by its customers, investees, and insureds.

4.5 Externalities: the “internalisation rate” of unaccounted externalities in the costs and value

creation of doing business (as these are either not recognised or off-loaded on society) is accelerating

by advanced businesses, which results in the identification of circular economy opportunities, but also

reduces the exposure towards “stranded assets”.

Sometimes a shock is needed for the wake-up for transformation. For example, the 2013 Rana Plaza

accident has had a major impact on the entire garment and apparel sector. It has definitely

accelerated the “internalisation rate” momentum in this sector, with direct multi-stakeholder

involvement. The severity of this accident and the attention in the international public domain has

shown the risk of liabilities, the costs of conflicts and accidents, and the loss of reputation (throughout

the value chain even across the sector, i.e. including those companies not directly linked to the

accident).

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4.6 Show me the value: the notion of “show me the money” (profits to the shareholder) is clearly

graduating into “show me the value” (benefits to all stakeholders, without unduly negatively impacting

society).

During the dialogue, the True Price Foundation made a presentation on the need to recognise,

measure and monetise the externalities currently not accounted for in risk analyses, valuations and

product prices. This fits in a wider international trend to measure and monetize externalities. UN-

TEEB, the WBCSD, the Natural Capital Coalition and the Natural Capital Declaration are among the

platforms and institutes that work in this field4. Also various accountants and consultants including the

Big-4 are contributing to this movement5. True Price is among the leading international incubators

working towards both positively and negatively measure and even monetise the environmental and

social externalities by developing and testing methodologies for true pricing (for products),

multidimensional P&L6 /true value (for businesses), and true returns (for investment portfolios). The

MNE-GLs are used as standards’ baseline and it considers non-traditional forms of capital such as

natural, human, social next to financial capital.

The International Integrated Reporting Council (IIRC) also considers, in addition, “intellectual” and

“manufacturing” to be two distinct forms of capitals7.

4.7 New corporate boundaries: the traditional, mostly-legal boundaries of corporate responsibility

and accountability are becoming increasingly blurred. This is reflected in the MNE-GLs, whereby

certain responsibility is recognised for a company not only by “causing” or “contributing” to adverse

impacts, but also by being “directly linked to operations of a business relationship causing the adverse

impacts”. This notion defines an extended accountability and responsibility for impacts, requiring

companies to deepen and broaden their due diligence. The category “being directly linked” is of

particular relevance to the financial sector.

4 See amongst others TEEB (2008) The Economics of Ecosystems and Biodiversity Interim Report, NCC (2014) Taking Stock: Existing initiatives and applications. 5 See amongst others: PwC (2013) Measuring and managing total impact: Strengthening business decisions for business leaders, KPMG (2014) A New Vision of Value: Connecting corporate and societal value creation, True Price, Deloitte, EY, PwC (2014) The Business Case for True Pricing. 6 True Price (2015) Multidimensional P&L in brief. 7 IIRC (2013) The International <IR> Framework.

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4.8 Leverage: businesses are encouraged under the MNE-GLs to use their leverage within their

value chain as a way of responsibly conducting business with suppliers, contractors, partners, and

customers (including investors and investees).They may do this alone, in cooperation with partners or

within the sector.

In the structuring of financing, RBC-related conditions precedent as well as subsequent may be

included.

4.9 Materiality: the question “what matters to whom” has become a major area of attention and

expansion, especially since GRI-G4 was launched in 2013. Leading businesses (including all

participants to the dialogue) are increasingly publishing their materiality matrix, linking and ranking in

their annual report the relevance of issues to stakeholders (and society) with those of the company.

4.10 Confidentiality versus accountability: the question around client- and competition- sensitive

confidentiality versus public accountability is an issue which needs to be further explored with

emphasis on the “materiality to customers, to other stakeholders and society”.

Policies and aggregate exposures to certain sectors and instruments should, in the opinion of the

author, definitely be regularly reported.

4.11 Leadership: all of these external, societally driven initiatives offer the financial sector an

opportunity to show a broader perspective, offer practical advice and conduct leadership towards a

shared, long-term interest between private sectors and society-at-large. This requires consistent

engagement with stakeholders. Many Dutch companies (including financial institutions) are

recognised to be open to have such meaningful multi-stakeholder approaches on policies and

transactions.

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5. THE FI SECTOR MUST DO THE HEAVY-LIFTING ITSELF

5.1 Integration: embedment of integrated thinking and broad-based action by the financial institutions

requires awareness, creating the right culture, training, professional focus and self-confidence in order

to engage with relevant stakeholders and society. By sharpening their own diagnostics and research,

financial institutions will become more authoritative on relevant developments and issues, while its

capital mobilisation and advisory services is supporting long-term value creation and asset protection

for its customers and itself.

5.2 Data quality: the quality of available data - for example, on the “real economy”, industry

developments, clients’ value chains and externalities – is a critical risk and success factor. Also, the

access to risk analytics, independent impact assessments and (buy-side) rating methodologies are

important factors going forward.

5.3 Disclosure and self-confidence: the financial sector must improve its disclosure and external

communication attitude about its operating standards, policies and performance. Considering its

commitment to the RBC mission, the Dutch financial sector has recently made significant progress,

most notably through increased stakeholder engagement, policy development, and participation in

(international) industry platforms, performance and disclosure. Still, much more can be done,

individually and, importantly, collectively.

5.4 Explicit adoption of the MNE-GLs: the MNE-GLs are the starting point for the Sector Covenant

Process and should be recognised as the key guidance for its own business principles and practices.

The MNE-GLs are not only focused on the ambition of “sustainability” (foremost the environment,

climate change, social justice), but extend this by introducing the theme of “responsible business

conduct” (RBC). This includes other important aspects to consider, such as bribery, consumer

protection, science and technology, competition, and taxation.

In addition, the financial sector may, of course, maintain its broader society engagement, which

includes foundation support, and community services like financial education and empowerment.

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5.5 Due diligence strengthened: in the view of the author, the key theme to be strengthened is the

initial and on-going risk-based due diligence in the entire value chain. In this context it should consider

as scope the notions of current “activities directly linked to adverse impacts”, the ”materiality” of an

issue for all stakeholders, as well as its potential impacts on, or benefits to society-at-large. It should

also consider using its individual or collective “leverage” to address the impacts. Stress-testing

exercises on clients and transactions may be expanded beyond the traditional, purely economic

approaches, to include societal developments (resource availability, loss of biodiversity,

environmental degradation, social injustice, climate change, fundamental values) affecting the

resilience of the sector.

Much can be learned from leading customers and investees. Benchmarking other, less advanced

companies with such leaders offer useful insights, input for sector policies and advice to such others.

5.6 Making the financial institutions (FIs) better fit for tomorrow:

fully integrate comprehensive ESG/RBC factors into the core risk and research analysis and approval processes, including in the KPI’s and Risk Appetite Framework & Statement;

accelerate awareness, training for all “lines of defence” (customer-facing, risk-function, control & audit);

become the authoritative example/benchmark for public reporting (integrated reporting, including G4);

make use of emerging approaches/tools such as entire value chain impact mapping, foot printing, circular economy principles, monetising externalities and integrated P&L.

The term “impact-investing” may still be considered an oxymoron but should, in the view of the author,

eventually become a tautology. In an increasingly fast-paced, changing world, the risk of value-

impairment and stranded assets is becoming more prominent, particularly for long-term investors.

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5.7 Making customers better fit for tomorrow’s challenges and opportunities: a common

approach may be to stimulate and assist corporate customers to significantly improve their risk

analysis and disclosures, making use of the EU Directive on non-financial reporting (applicable to any

company with more than 500 employees). Organised trainings, workshops and advisory services may

also be of benefit.

5.8 Making markets better fit for purpose: raise, together with regulators and supervisors, the

quality of disclosure/transparency by the sector itself and their customers and investees: Pillar 3 of

Basel 3/Solvency II market-disclosure at the centre. Also, migration from combined reporting to

materiality-based integrated reporting (including using GRI-G4) should be strived for.

It should be recognised that not reporting potential material issues on impacts on the company itself

as well as on those affected by the company on its stakeholders, including society, may become a

liability.

5.9 Tone from the top: strengthening the public standing by much a more vocal “tone from the top”

on ESG/RBC directions and issues, both internally as well as externally in the media and at

conferences.

5.10 Access to remedy: having a stakeholder help desk or even a “grievance mechanism”, such as

an independent committee or an ombudsman for issues in the value chain (similar to what FMO has

created), may be considered.

6. THE FI SECTOR CANNOT DO IT ALONE: THE ROLE OF GOVERNMENT

6.1 Enabling environment: a key contribution for the government is making the financial sector and

financial markets systemically more resilient but also “fit for work”. A coherent, effective control

environment is recommended to be created by regulatory and supervisory interventions (regulations,

policies, guidance) which are fully aligned with societal priorities.

6.2 Coherence: (sub-)sector codes, regulations and policies through organisations like OECD, UN,

BIS, EU, ECB, as well as the Dutch government, DNB, SER-ICSR (IMVO) are recommended to

provide more coherent regulations and policy guidance , as well as explicit recognition for structured

approaches to value chain risk analyses.

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“Sustainabilising” and (socially) stabilising value chains for defensive portfolio risk purposes may be

practiced, as well as realising the potential for strategic and practical value chain advisory services by

financial institutions to their customers; such approach may also directly strengthen their earnings

capacity. New regulations, policies should not unduly increase the burden of internal controls or

supervisory oversight: also here the materiality concept is of the essence.

6.3 Current regulations and codes are not sufficiently compatible or even counter-productive to

the new RBC/ESG agenda. Experts from the financial institutions should, possibly at the invitation of

DNB, prepare an issue-paper with an overview/evaluation of specific requirements and processes

which may be obstacles. It is recommended that they make recommendations as to how regulations

and codes may support the RBC agenda, and how a “bonus/malus” approach may be considered on

risk weighting/capital charges in order to facilitate pricing (dis-)incentives for customers.

6.4 Precompetitive consultation within the financial sector on ESG/RBC directions and issues

may be intensified through the sector organisations, with DNB (and AFM, the Netherlands Authority

for the Financial Markets) possibly serving in a convening and stimulating role.

6.5 Precompetitive consultation of the FI sector with society may be intensified, with the Dutch

Government (Ministry of Finance, Ministry for Foreign Affairs, other) as interested convener and

facilitator. This approach would be similar to the process on bank transparency which was hosted in

2014 by the Dutch Ministry of Finance and which now has been adopted for further action by the NVB.

This may be done in a structured way, e.g. two times per year, with focus on society-strategic issues

which could be related to the 2015/2016 international agenda mentioned above.

6.6 Governance: the new agenda with focus on the “duty of care” and “universal ownership” of the FI

sector may also have consequences for governance, such as the composition of the Supervisory

Board. It is recommended that “society” is more strongly represented.

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7. THE FI SECTOR CANNOT DO IT ALONE: THE ROLE OF SOCIETY

7.1 Media and civil society organisations have an important role in challenging as well as

supporting the FI sector to fulfil its traditional and new roles, as described in this paper. Risk

management is all about taking medium- and long-term, informed decisions (i.e. beyond a regulatory

1 year horizon for the Probability of Default). It is important “to know what you ought to know”, but

actually don’t.

So the question is, how can we know such issues? Who can assist? Many societal issues, such as

inclusiveness, environmental degradation, loss of biodiversity, climate change and social justice,

reflect processes of creeping insolvency until a major disaster occurs as a wake-up call. Early,

effective preventive or corrective action is morally required and business-wise prudent.

7.2 Knowing & showing: an increasing number of civil society organisations recognise that the

issues at stake are so important and urgent to address, that they are taking, next to their traditional

advocacy role, a more strategic approach. This may also be attributable to their accredited role, since

2011, in the MNE-GLs: from a single issue challenger solely on the basis of “naming & shaming” to a

new, constructive one on the basis of “knowing & showing”. This implies raising an issue to resolve it

but also for putting this in a broader, even systemic context for balanced solutions.

7.3 Do not disengage: financial institutions may build on this development by intensifying their

structured dialogue with civil society organisations. They should not disengage from the issue or

impact, but rather endeavour to address and resolve it, as is also stated in the OECD MNE-GLs

By doing so, they will, at the same time, sharpen and innovate their business, enhance their

reputation, and reduce the costs of conflict. While this will require significant commitment and

resources, it is strategic and even “existential” for the financial sector.

7.4 Structured dialogues: it is recommended that a regular (semi-annual) sector dialogue is held by

the sector with civil society organisations and members of parliament, to mutually learn from and

advise on issues and initiatives from both within the sector and civil society organisations. Doing so

would support an improved mutual understanding and trust, and may also foster better alignment

among civil society organisations.

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7.5 Education and ongoing training on RBC issues should, with support from the sector, be

significantly strengthened. Universities and other knowledge centres are recommended to allocate

more resources for RBC education and research.

8. CONCLUSIONS AND FURTHER STEPS

8.1 Extended due diligence is essential: financial institutions may strengthen the resilience of the

financial system, preserve and create value and rebuild their trusted role in society by integrating and

balancing their own interests with those of their stakeholders as well as society, into their due

diligence.

8.2 Putting the recommendations into practice: the multi-stakeholder OECD ProActive Agenda for

the Financial Sector and the Dutch Sector Covenant Process offer an opportunity to come to new

sector baselines for RBC principles and practice.

Amsterdam, 29 July 2015

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For further information about this paper you can contact the author at mrhermanmulder@gmail.com