«A case study of Fair Finance Guide International Transparency & Accountability in the Financial Sector A case study of Fair Finance Guide ...»
Except for the EU Directive on Administrative Cooperation and the EU Directive on Non-Financial Reporting, the Swedish government has transposed the Directives presented in this table to Swedish laws and regulations.The Swedish regulation regarding transparency and reporting is mainly focusing on the supervision of financial risks and governance of banks.
Banks are required to report financial data to the Swedish Financial Supervisory Authority regularly. Banks must also submit an annual report to authorities with information about the operations, risks and other financial information. The content is regulated by a specific regulatory code for financial institutions: FFFS 2014:14.184 The European capital requirement directive requires Swedish banks to report country-by-country on their tax payments, profits, costs and revenues. In 2014 the report must only be submitted to the EU Commission, but from 2015 onwards it must be publicly available. An overview of the applicable and relevant regulation on transparency in the financial sector can be found in Table 19.
For many years there has been an increasing debate in Sweden about the lack of
transparency in the financial sector. The attention has especially been on three topics:
misleading information about ethical considerations by mutual funds;
poor transparency in engagement processes; and lack of disclosure of the carbon footprint from investments.
The debate on banks’ social responsibility has for a long time focused on the issue of controversial investments in mutual funds. NGO’s and consumer organisations have repeatedly criticized banks and pension funds for not living up to their policy commitments. In 2011 the industry organisation Sweden’s Sustainable Investment Forum (SWESIF) made an effort to improve the disclosure of ethical considerations by mutual funds by creating a template for this information. As of today 150 mutual funds use the template. 187 The Fair Finance Guide argues that the information is too general and leaves room for gaps in expectations.
Linked to this is the lack of transparency in engagment processess of banks and other investors. Engagement (trying to convince companies to act responsibly through dialogue) has, for many years, been the main approach to responsible investments in Sweden.
Engagement is also generally recognized by Swedish NGO’s as a responsible measure, but they often criticise banks for not disclosing information about the process. The dialogues are often very secretive and can go on for years without any visible progress to outsiders. The poor transparency has halted many discussions about specific controversial cases when banks keep referring to dialogues behind closed doors. Some banks now report on their engagement in annual reports, but still only anectodal examples.
In January 2015 the new Swedish Minister of Financial Markets initiated a public investigation on how to improve the disclosure of sustainability information to consumers within asset management. The investigation will also assess if a mandatory annual progress report is necessary. Recommendations will be published in December 2015.188 Another current debate is the reporting of the carbon footprint of investments. The debate intensified after a report in 2013 by WWF which had calculated the financed emissions by the Swedish public pension funds.189 As a response the former Swedish Minister of Financial Markets urged the public pension funds and other institutional investors to measure and report on their financed emissions.190
-69In 2014 one of the seven public pension funds announced that it will start reporting on their financed emissions in 2015. The new Minister of Financial Markets has also stated that he is considering imposing mandatory reporting of financed emissions by all the public pension funds.191 In a 2015 study SwedWatch concluded that none of the Swedish banks performed any comprehensive measurement and target-setting with regards to their mutual funds’ carbon footprint. 192 In March 2015 Swedbank was the first bank to publish a report with carbon footprint data for all their own-managed mutual funds.193
8.3 Results of the policy assessment The results of the assessment of the two most relevant themes of the Fair Finance Guide methodology are summarized in Table 20.
All seven banks provide general descriptions of their Environmental and Social Risk Management Systems (ESRMS), but it can sometimes be difficult to follow the process from policy to practice. None of the banks state that the ESRMS is audited by a third party.
Several banks divide the reporting into two sections: Responsible Investments and Responsible Lending. The investment principles are usually quite general, often referring to general statements on social responsibility. Often references to international standards are made, especially to the OECD Guidelines and the UN Global Compact.
All seven banks state that they screen investments, especially within asset management.
Some banks also screen corporate credits that exceed a certain monetary threshold. Both engagement and voting is used to influence companies where banks hold equity investments, and several of the banks publish a list of companies that are “black-listed” from investments due to complicity in violations.
None of the banks publish a complete list of the names of companies and governments that they invest in. In Sweden this is only done by the alternative bank, Ekobanken, which is not included in the study. A few of the banks publish the holdings of their mutual funds, but there never is a complete list. None of the banks publish the names of companies that are granted credits.
In order to inform the public banks could, as an alternative to publishing names of companies invested in, publish a breakdown of outstanding investments to region, size and industry (in line with GRI FS6). This is done by SEB and Swedbank, but none of the banks does it on a detailed industry level.
-70Five out of seven banks (Handelsbanken, Länsförsäkringar, Nordea, SEB and Swedbank) publish the number of companies that have been engaged with on ESG issues the latest year.
Only Swedbank publishes a more extensive list of the company names and the respective topics that the engagement concerned. The content and results are however reported anecdotally.
All seven banks publish a CSR report. The reports are externally verfied but the level of assurance varies. Five of the seven banks (Danske Bank, Länsförsäkringar, SEB, Skandiabanken, Swedbank) report according to the GRI G4 Sustainability Reporting Guidelines, which includes the Financial Services Sector Supplement (FSSS). Several banks also publish a separate report on responsible investment.
In these sustainability reports, none of the banks report in detail on their stakeholder dialogues with civil society organisations. At best a few examples of general topics that have been discussed are mentioned. Only SEB has a grievance mechanism that is communicated to be open for external stakeholders and social organiations.
Danske Bank, Nordea, Länsförsäkringar and Skandiabanken report country-by-country on income, profits and tax payments in line with the CRD directive. The other three banks report this information individually only for their major markets.
All seven banks list their subsidiaries, but the lists are not complete as they only cover the “major undertakings” of the subsidiaries. Some banks list their worldwide branches as well.
Several of the banks have branches in Luxemburg, which is considered a tax haven. Nordea also mentions a branch in Isle of Man, another tax haven. None of the banks has a clear policy against providing financial services to companies in tax havens. SEB and Handelsbanken have policies against participation in transactions to avoid taxes.
Transparent banks are expected to publish their responsible investment and finance policy as part of their risk management system. All seven banks have policies against corruption and bribery within their own organisation. They also apply the principle on their investments, at least by their assset management divisions, normally by requiring companies to comply with OECD Guidelines for Multinational Enterprises and/or UN Global Compact which supports the principle. None of the banks require that companies report country-by-country on tax payments.
8.4 Best practices
Examples of best practice in transparency can be found at SEB which publishes several sector-specific policies where specific references are made to a number of named international standards. The policies also make clear that they apply to all the banks’ investments and business relationships.194 Swedbank is leading with regard to reporting on engagement processes and voting. The bank publishes regularly an extensive list of both the company names and the specific topics that the bank has engaged in and discloses its full voting record.195 The bank also publishes a quarterly newsletter which includes updates on some of the current processes and issues.196 Swedbank is also the first bank to publish carbon emissions data for all of their own-managed mutual funds.197
Financial markets – covering banking, securities, derivatives and insurance industries – are huge in contemporary economy and society. The monetary value of world financial transactions reached 25 times the gross world product in 1995 and grew further to 70 times gross world product in 2007.198 Turnover on wholesale foreign exchange markets rose still more from US$3.3 trillion per day in 2007 to US$5.3 trillion per day in 2013, some 60 times the value of international trade.199 Today far more money circulates in financial markets than in the ‘real’ economy of goods and services.
This vastly expanded financial sector could work for enormous societal betterment. Imagine what the potential capital investment could do to advance climate mitigation and other ecological sustainability; digital access (58 per cent of humanity is still offline); quality education, health and shelter for all; conflict transformation in areas of longstanding violence;
and so on. Finance can be – and frequently has been – a force for much improved livelihood.
Yet today’s financialised economy has also too often worked against public welfare. For one thing, the period since market liberalization took off in the 1980s has witnessed recurrent financial crises across the planet. This includes a major meltdown across the North Atlantic region in 2007-8. In addition, existing operations of financial markets have promoted an enormous concentration of wealth in few hands, so that the richest 1 per cent of world population now own 48.2 per cent of all assets.200 At the same time rolling scandals expose a string of rogue financial traders and crooked financial executives. Meanwhile the impacts of finance on environment, peace, social cohesion and democracy go largely unchecked.
The circumstances generating these negative outcomes of contemporary finance are many and complex, of course, but shortfalls in public transparency play a significant part. As the editors of this volume note, without adequate transparency wider society cannot exercise informed and democratic oversight of the financial sector. Thus where transparency is missing, accountability will be lacking also. And where accountability is missing, power (such as that of today’s major financial actors) is readily abused. This is why transparency of contemporary finance is so vital.
9.1 What Transparency?
‘Transparency’ is quite a buzzword in contemporary politics and an assumed ‘good thing’; yet what does it entail more precisely? What is transparency? What needs to be transparent?
What purposes does transparency serve? Who needs to be transparent? To whom is transparency directed? By what mechanisms is transparency achieved? The following paragraphs successively address these questions as they relate to finance today. The overall message is that, while transparency is laudable as a general principle, the specifics of its execution also matter a great deal. For example, in some guises transparency generates only minimal policy adjustments, but in others it can promote far-reaching economic and social transformation.
-73To begin with, then, what is transparency as a general concept? In a word, transparency entails openness and visibility. It means that actions and circumstances are observable and assessable. In the absence of transparency, people are ignorant of and cannot scrutinize a situation. Without transparency other aspects of accountability (such as consultation, review and redress) cannot be effectively attained. Thus transparency is a sine qua non of accountability.
Beyond this relatively simple foundational principle things get more complicated and contested. For instance, what more exactly needs to be transparent in respect of finance? It is broadly agreed that financial entrepreneurs and companies should be publicly registered and that their performance should be publicly reported in some way. However, disagreements abound concerning the types and amounts of information that should be disclosed about such matters. What should a financial institution reveal about its ownership, assets, clients, organizational structure, decisions, activities, revenues, profits, social impacts, and environmental consequences? What should be the timing of such disclosures: immediate or after certain intervals? What exemptions should be allowed: e.g. for reasons of personal privacy or public safety? In general, the financial industry tends to default towards less transparency, while public-interest advocates default towards demanding more. After all, information is a key source of power.