«A case study of Fair Finance Guide International Transparency & Accountability in the Financial Sector A case study of Fair Finance Guide ...»
National bank BNI is, although receiving poor scores in various themes/sectors, considered better compared to other national banks in terms of its ESRM policy. BNI publishes its loans portfolio that shows a declining trend over the years in its credit provision for companies that have red or black category (i.e. the poorest level of environemntal standards compliance) in PROPER. For instance, in 2011, BNI provided 602 billion rupiah for companies with a black category, but in 2013, it reduced this to 0. Over the same period, BNI increased credit to companies with a gold category from 0 to 9,448 billion rupiah.
6.1 Government policy The following regulations regarding transparency are relevant for the Japanese financial sector. See Table 13 for an overview.
There is very little debate on increasing transparency among banks in Japan, as it is the cultural norm for banks to protect the privacy of their clients. Banks are rather mandated by their own industrial standards to keep information confidential. Yet, some progresses has been made in recent years.
In 2010, a committee called upon by the Minister of Environment and led by Takejirou Sueyoshi (then special advisor of UNEP Financial Initiative) proposed in its final report that a principle be sought to promote environmental financing. Since then, Takejirou Sueyoshi himself initiated a committee composed of representatives from banks, credit unions, financing cooperatives etc. and in 2011 drafted the Financial Action Principles for building a Sustainable Society (also known as the 21st Century Financial Action Principles). The Principles are constructed of seven non-binding principles. Principle 6 stipulates that financial institutions shall make an effort to disclose their efforts to ensure sustainability. As of March 2014, 193 financial institutions have signed the Principles.The full list of institutions is disclosed on the website of the Ministry of Environment.131 On June 14th 2013 the Cabinet addopted the Japan Revitalization Strategy. In the set of strategies, it was mentioned that a set of guiding principles should be drafted to ensure responsible investments by institutional investors, for the purpose of promoting sustainable growth of Japanese businesses. As a response, the Financial Services Agency called a committee to draft the “Principles for a Responsive Institutional Investor” (aka Japanese Stewardship Code). The Principles drafted in February 2014 are constructed of seven non-binding principles, and Principle 6 stipulates that responsible institutional investors shall report to clients and beneficiaries the ways in which the institution fulfills its stewardship responsibilities including the exertion of voting rights.132 On August 7th 2014, the Financial Services Agency intiated an Expert Committee for the Formulation of Corporate Governance Code. To this day, the Committee has held eight meetings and drafted a concept paper on the Japanese corporate governance code. The paper has been disclosed for public comment till Jan. 23rd 2015 and will be further discussed by the committee which starts again from March 5th 2015.133
-53The Japanese Communist Party has been continuing an effort to tackle the problem of tax evasion by big businesses. The Party newspaper “Akahata” published on August 25th 2013 a top page article on tax havens and conducted interviews with Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group representatives. The interview asked about their involvement in tax evasion and all three have declared that they have branches in the Caymans, but for purposes other than tax evasion.134 The Japanese Communist Party also drafted a financial manifesto on November 26th 2014, which stipulates that the party will pursue the problem of tax evasion in accordance with the international debate.135 A network of eleven organizations, including NGOs and trade unions and initiated by the NGO Alter Monde Japan, has begun a public debate on financial transaction taxes to stop the flow of capital to tax havens.136 A suprapartisan group of parliamentarians have formed the Parliamentary Group on International Solidarity Levy on February 28th 2008, initiated by Liberal Democratic Party (LDP) Parliamentarian Yuji Tsushima. The group, after five study sessions, pressured the Ministry of Foreign Affairs (then headed by Masahiko Komura of the LDP) to join the Leading Group on Solidarity Levies to Fund Development in June 2008. The Ministery followed up by officially stating its intent to join the Leading Group in September 2008. The Japanese government has joined the Leading Group officially from November 2008.137
6.3 Results of the policy assessment The results of the assessment of the two most relevant themes of the Fair Bank Guide methodology are summarized in Table 14.
Regarding Transparency & Accountability, all banks comply with legally required disclosure of basic environmental data. They do this by reporting via the GRI reporting standards. In addition, the three mega banks (Mizuho, MUFG, SMFG) report according to the Financial Services Sector Supplement (FSSS) of the GRI. Furthermore, the three mega banks comply with the Equator Principles.
Mizuho takes the lead in Transparency & Accountability. This in itself is rather rare for Japanese banks, as they usually all act in the same way, ending up with similar policies and practices.
-54The Transparency & Accountability theme is one of the very few themes/sectors where potentials are very high for Japanese banking groups. This is a very good starting point for Japanese banking groups to start catching up to international standards.
In addition, no bank published an audited sustainability report. However, many banks have sought third party comments on their CSR policy or had a portion of the report commented.
MUFG and Resona both have in their published reports, a third party’s ‘comment’. Mizuho and SMFG have an equivalent to this where they have a third party comment on their overall CSR policy (as opposed to the report). SMTH did not have any third party comments on their CSR Report. This is another element where Japanese banks can easily improve their practices.
None of the banking groups has a published policy to prevent tax evasion, both by the bank itself as by its clients.All assessed Japanese banking groups have signed the Global Compact for their internal operations, thereby stating that corruption and bribery is unacceptable within the bank itself. Sumitomo Mitsui Trust Holdings (SMTH) demands its portfolio companies to also comply with the Global Compact and has dialogues whenever necessary. The overall low scores for Taxes & Corruption has to do with the tendency of Japanese banking groups to value their confidentiality mandate over their transparency mandate.
All assessed banking groups have branches or subsidiaries overseas. However, Mizuho, Resona and SMTH were the only banking groups to disclose a complete overview of its branches and subsidiaries. MUFG and SMFG both have a disclosed list of overseas branches and subsidiaries of corresponding ‘banks’ but do not have a comprehensive list of the ‘banking Group’. A clear list of services is not disclosed in any case.
6.4 Best practices
As scores are not very high to begin with, not many ‘best’ practices are available. That said, Sumitomo Mitsui Trust Holdings (SMTH) earned a score in a very characteristic way which the other banks should follow. SMTH was the only bank that describes its Environment and Social Risk Management System (ESRMS) and provides insight into how the financial institution ensures that investments meet the conditions set in its policies, for corporate loans, project finance and asset management. The banks that have signed the Equator Principles scored a 0.6, as they described their ESRMS for Project Financing only.
In addition to this, SMTH was the only bank to disclose the number of companies which they have engaged with, although only for their asset management activities. Moreover, SMTH has used engagement activities to influence companies who have been involved in the manufacturing of cluster munitions. This is an exemplary case of engagement activity and its disclosure in Japan.
7.1 Government policy Since the financial crisis, civil society has been lobbying to enhance transparency in the financial sector. One of the issues they most strongly urged for, also at European level, has been country-by-country reporting on tax payments, which would provide an insight in the substance of financial operations in tax havens and hence in potential tax evading behaviour.
At the European Union, especially France insisted on drawing EU regulation for this issue.138 For years though, country-by-country reporting was rejected because of the exorbitant costs and constraints it would place on the private sector. In addition, the European Commission was hesitant about publishing this data.139 Nevertheless, in 2013 the EU Capital Requirements Directive was put into practice, which requires all financial institutions in EU member states to publish financial information for each country the institution is active in from January 2015 onwards.140 Other relevant EU Directives developed in this context but not yet put into practice by all the EU countries are the EU Directive on Non-Financial Reporting (2014/95/EU) and the EU Directive on Administrative Cooperation. The already existing Anti-Money Laundering Directive (AMLD) of 2005 is currently under proposal of amendment, so that information required by it becomes public for authorities and people with a legitimate interest such as journalists. 141 Table 15 provides an overview of the European regulations regarding transparency in the financial sector.
-59Dutch regulation regarding reporting is mainly focusing on the supervision of financial risks and governance of banks. Laws and regulation about non-financial reporting, are not yet established in the Netherlands. The next section presents the debate and recent developments in society, amongst NGOs, politics and financial institution about this topic.
Current debate In the Netherlands, transparency is considered part of a companies’ Corporate Social Responsibility (CSR). This is showcased by, amongst others, the annual ‘Transparency Benchmark’ published by the Dutch Ministry of Economic Affairs. This is a research among Dutch companies, including the financial sector, comparing the transparency in the CSR reports of companies. The Benchmark does not include concrete activities of companies on CSR or results regarding CSR, it looks at how companies report about it. In 2014, thirty Dutch financial institutions, including banks, have participated in the 2014 edition, and scored above average.156 However the Transparency Benchmark focuses on the own operations of financial institutions and does not assess criteria regarding the core business of financial institutions their investments.
For companies with more than 500 employees, including stock listed companies as well as other public-interest entities, European legislation has adopted a law in April 2014 which obligates such companies to include non-financial reporting (NFR). This law also obligates companies to report on their due diligence processes and has a compulsory character. Within two years from now, the Netherlands will also have to implement this legislation, meaning that among 100 Dutch companies will fall under its scope.157 The Dutch ’MVO platform’ (CSR Platform), a coalition of NGOs, is a strong advocate of implementation of this legislation in the Netherlands and therefore commits to enhancing NFR into the already in the Netherlands existing Transparency Benchmark.158 In line with this process, several organizations have encouraged Dutch banks and other financial institutions to increase transparency regarding its investment policies, its investments and a number of other issues, all taken into account in the policy assessment of the Eerlijke Bankwijzer (Fair Bank Guide) and a Case Study on Transparency and Accountability in 2011.
The update of this case study in 2013 showed that, although some smaller banks became more transparent in recent years, most banks still lack transparency on their investments, lobby activities, tax payments and company structure. 159 Also the organisation SOMO campaigned for more transparency on lobby activities of financial institutions and published a report about that in December 2013.160 In March 2014, The Dutch Fair Bank Guide, in cooperation with EY, organized a ‘learning meeting about banks and transparency’, facilitated by the Dutch Ministry of Finance. Forty representatives from seven banks, the Dutch banks’ branch organization NVB, four auditors, supervisors DNB and AFM, three ministries, a research organization and several NGOs attended the meeting. Four sub-sessions made concrete suggestions on four topics: KPIs and materiality, transparency about the impact of active ownership (engagement, voting etc), transparency about assets and about loans. The Fair Bank Guide and EY strive for a covenant or statement with banks on transparency.161 In June 2014, the Fair Bank Guide joined a stakeholder meeting with the NVB and did specific suggestions to include more transparency in NVB’s final version of its Social Statute.
Late 2014, the Dutch Banking Association (NVB) renewed its ‘Code Banken’ (Code of Banks), including a Social Statute.