Responsible Finance to Change the World

Hakim Fekih, Master’s in Management student at ESSEC Business School and member of the association NOISE, a student alliance dedicated to sustainability and responsible entrepreneurship, shares his insights into the various dimensions of responsible finance.  

Finance – a big word, synonym of an El Dorado for some, and a dragon to slay for others. It is true that since the crisis of 2008, this sector of the economy has become a true bogeyman for every student claiming strong social and ecological convictions. After all, how can we fail to understand them? Since the 1980s, deregulation in this field has led the world towards a succession of financial crises that whole populations have had to pay a high price for. It has been one of the main vectors for the increase in social inequalities throughout the world. Moreover, the close links which connect the big banks to companies working in the most polluting industries cannot be denied. In short, finance is evil incarnate – and this has been known for some time.

However, since a few years, we cannot help but hear people speaking of a new concept, for some an oxymoron: ‘responsible finance.’ The most skeptical among us will say that it’s a simple change in banks’ and multinationals’ marketing strategy to clean up their image. The more optimistic of us will see a real opportunity to change the world. But, fundamentally, what is responsible finance?

Socially responsible investing: a change in mindset

Socially responsible investing (SRI) has existed for much longer than we think. It finds its origins in the Quaker movementa philanthropic movement that saw the light in the 19th century and committed to the abolition of slavery and all forms of violence. In the 19th century, several religious movements in the United States forbade their members to invest in arms manufacturers or alcohol. Nevertheless, SRI per se is said to have been born in 1971, a year in which two pastors from the Methodist church – Luther Tyson and Jack Corbett – launched the Pax World Fund, an investment fund proscribing investment in companies working in the arms business. Finally, since 2006, the UNO has recognised SRI by integrating the principles of responsible investing (UNPRI) in Global Compact.

Four major types of socially responsible investing are usually distinguished:

  • ESG selection:This is the case when investors select companies in which they want to invest according to environmental, social and governance criteria (ESG). The most employed method is the ‘best in class’ approach which consists in investing in companies having the best marks according to extra-financial criteria.
  • Exclusion:The so-called ‘exclusive’ approach consists in proscribing investment in companies linked to sectors that harm society and the environment – such as tobacco, arms or the petroleum industry. In the United States, for example, several SRI funds exclude the nuclear sector.
  • The thematic approach: This entails choosing companies in which to invest according to a specific sector of activity such as renewable energies, water, waste management or help to the handicapped.
  • Shareholder activism:This entails shareholders having the possibility to discuss with the company to push it to implement strong CSR policies, and by using their right of vote as a means of pressure during general assemblies.

Green finance: A solution to global warming?

Green finance is often defined as the representation of the market in green bonds. According to the French Ministry of the Environment and Ecological Transition, a green bond is ‘a bond put on the market for investors by a company or public body enabling the latter to finance their projects contributing to ecological transition and the development of infrastructure’. As such, it incites companies and state bodies to reorient investments towards a low-carbon economy that is respectful of the environment. According to the NGO Climate Bounds, more than half of these bonds are today issued by the public sector, with 30% coming from companies and 20% from financial institutions. Even if today the sums remain marginal, representing 0.01% of all financial products, their rate of growth is phenomenal. Since the COP 21, the number of green bonds issued has increased by nearly 27%, according to the Green Bonds Initiative. This is explained by the fact that it is a relatively young market. Then ECB, for example, the leading issuer of green bonds, was only launched in 2007. An increasing number of companies and multinationals, even those reputed as the most polluting, have begun to invest in the energy transition and green energy.

Micro-finance, a weapon against poverty

Developed with the Grameen Bank in the 1970s in Bangladesh by Muhammad Yunus, micro credit consists in granting small loans to people excluded from the classic banking system because of their low revenue. The loans enable them to launch micro-projects with an aim to financially support themselves and lift themselves out of poverty. Today, the Grameen Bank counts more than seven million clients – something that demonstrates its resounding success. Moreover, this experience has shown that those below the poverty line were capable of paying back their loans – and this even with very high interest rates which allowed the bank to cover its costs. Since the success of this experience, micro-finance institutes have continued to grow in number throughout the world, in particular in developing countries. Today, there are more than 665 million accounts affiliated to more than 3,000 micro-finance bodies worldwide. In India, for example, 18% of the total population are account holders in these institutes. These institutes fall into 4 major categories of provider: informal providers, mutual benefit associations, NGOs and institutional financial structures. Moreover, large commercial banks have also now begun to develop micro-credit services.

A final word

These examples show that something is beginning to happen in the world of finance. All these movements are recent and they are witness to a change in mentality which is underway. Granted, today there are critics of socially responsible investing, green finance or micro-finance. And indeed, many think they are simply communication strategies without tangible and positive impact on society. But the fact is that these initiatives are real, confronted with various obstacles but they endure and continue to grow in number. We can continue to see finance as a danger to avoid, a dragon to slay – or else we can decide to consider it as a simple tool and use it intelligently to reach social and environmental objectives.

By Mr Hakim Fekih, NOISE ESSEC

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