Sustainable Finance Project
The Conduct Costs Project is part of the wider Sustainable Finance Project and is led by Roger McCormick.
For more information about the Project, please check the blog on http://blogs.lse.ac.uk/conductcosts/
The Law and Financial Markets Project has launched a new research initiative on Sustainable Finance. This is being led by the Roger McCormick.
The Sustainable Finance Project’s objectives are, first, to develop and, as far as possible, achieve international consensus on the following:
a) the legitimate aspirations of market participants and others in relation to sustainability in the context of financial market activity;
b) what is meant by “sustainable” in the context of:
lending to capital projects
lending to corporates
insurance and re-insurance (including insurance broking)
private equity, venture capital and hedge funds
wholesale financial markets
sovereign wealth funds
c) the relationship between ethical awareness (as reflected in the culture of a financial institution) and the desire to conduct business with due regard to "sustainability"; and
d) the ways in which the adoption of good governance practices and principles can be buttressed by greater accountability, changes in culture and structural changes in the relationships with stakeholders in civil society
In the context of the above, the Sustainable Finance Project will explore the possibility of extending the concept of “ESG” (environment, social, governance) to embrace Systemic Responsibility within financial institutions, i.e. the adoption of a business and risk management culture that takes full account of the institution’s responsibilities (in addition to those of regulatory bodies) in relation to the maintenance of a sustainable financial system, particularly in times of extreme financial instability.
Other objectives of the Project include
the development of a methodology for assessing the success of market participants in achieving sustainability goals;
assessing the relationship between the success referred to above (or lack of it) and reputational risk and other formal or informal sanctions;
assessing the impact on the
above issues of law and regulation and of “soft law”.
International Comparative Legal Risk
The concept of Sustainability is frequently discussed in the context of financial markets. Many banks issue Sustainability Reports (by whatever name called) every year and nearly all of them wish to be perceived as having an acceptable response to the demands of the ESG agenda. They do not want to be seen, for example, as financiers of “dirty projects”, users of child labour or manufacturers of cluster bombs. But does this response go far enough in view of the issues thrown up by the financial crisis?
It is an important part of the LSE Sustainable Finance Project to consider how society’s understanding of the scope of the ESG agenda should embrace more effectively the sustainability of (a) retail and wholesale financial market practices; (b) business models and cultures (including their operational risk management effectiveness) within individual banks; and (c) the financial system itself. The project centres around the question: what does Sustainability mean in the context of banks and the financial system?
Recent remarks by luminaries such as Mervyn King and Andrew Haldane suggest that the public is very much in the dark as to the financial position of banks. (Haldane referred to auditors having to pin the tail on a “boisterous donkey” when trying to assess bank balance sheet items). It would seem to be even more in the dark about the “cultures” that operate within banks and the impact they have on governance and risk management. The LIBOR Scandal has caused questions of culture and ethics to climb society's agenda in relation to bank reform (as evidenced, for example, by the establishment of the Parliamentary Commission on Banking Standards and its reported proceedings). At the same time, concern over banks' ongoing difficulties with operational risk, which continue to result in substantial losses as well as the imposition of heavy fines, has increased. The legal risks (deemed by Basel II to be an example of operational risk) attendant on poor op risk management are becoming increasingly serious, as are the reputational risks.
The International Comparative Legal Risk work programme seeks objective (or "concrete") indicators in relation to such “cultural” (or behavioural) issues and suggests way of assessing them and presenting them in an accessible format. It also raises questions about the relationship between Sustainability and governance and the differing practices of regulators in different jurisdictions (both as to substantive behaviour and the accessibility of information). Analysis of the immediate financial consequences of poor op risk management is a central feature of the exercise.
The principal long-term objectives of the ICLR programme are as follows:
The motivation for the programme
stems in part from a desire to make progress on the adoption of stronger
governance practices and ethical principles by banks and to understand how such
progress can be verified and how civil society can get beyond the “square one”
represented by the ongoing expressions of disaffection and protest relating to
banks and bankers generally. It is envisaged “square two” should include a
greater analysis of the social aspects of individual bank behaviour. In this
connection, “social aspects” means those aspects of behaviour that relate to (i)
the “riskiness” of the behaviour (whether in relation to the bank’s
shareholders, its customers, other stakeholders or the financial system (and
thus society as a whole)) or (ii) a perceived disregard of the values that are
adopted by the society that the bank is, in principle, supposed to be serving.
For analysis to be worthwhile, it is felt that the results should be presented
(a) in as accessible a format as possible and (b) in a way that enables
comparisons amongst banks to be made. The four Phases of work described below
have been devised by the ICLR Steering Group (which includes academics from LSE,
UCL and QM) with this in mind.
Proposed Work Programme
The Work Programme currently under consideration for 2013 (and then for repetition in subsequent years) is described below
1) In the period up to end March 2013 (Phase 1): to commission researchers to compile information on 10 banks, using the form which is summarised in the attachment as ICLR 1, for completion by 31.3.13. The 10 banks would all be household names and significant participants both internationally and domestically. (They may also be "SIFIs" but it is not intended that, as the project progresses, its scope should be limited to SIFIs). 4 would be from the UK, 4 from the US and 2 from continental Europe. There is no "magic" in the number chosen: if we had more resources, we would enlarge the exercise. But 10 is a reasonable number to start with. The jurisdictions covered would be, principally, the US, the UK and the other EU countries. Others may be added as long as it is practical to do so, given the need to treat all 10 banks in the same way.
2) The result of the work described in 1) is not a "league table" of "bad banks" as such, even though the data could easily be used to draw one up (simply by reference the monetary totals). But the data would also be relevant for:
a) comparing regulators and jurisdictions with each other;
b) comparing the amounts paid in relation to the different heads (set out in Form ICLR 2, attached);
c) considering which of those heads seem to be most problematic for (i) particular jurisdictions and (ii) particular banks; and
d) studying trends (per bank, per jurisdiction and per "head" of problem) over the period of time (5years) covered by the study.
3) After the completion of Phase 1,
the steering group would study the results and determine the best way of
presenting them (Phase 2). This should be completed in a month.
4) After Phase 2, each of the banks concerned would be given an opportunity to comment on the findings to date that relate to that bank. (Phase 3). This would take about 2 months.
5) After Phase 3, the completed findings would be published (in Q4 2013), with an accompanying seminar/meeting at LSE. (Phase 4)
6) Subject to the results of the 4 Phases, the exercise would subsequently be repeated to bring the findings up to date for the 12 months ending December 2013, so that a rolling five year finding (this time for the 5 years ending December 2013) starts (with the cycle being repeated each year).
Senior regulators have been reported as wanting to "pry more closely into how well banks are tracking and reducing risks" (FT, front page 26.11.12). This work programme offers a methodology for doing that in relation to some of the most important op risks faced by banks.
Enquiries about the Sustainable Finance Project should be addressed to firstname.lastname@example.org. (Mobile phone: 07802 604 316)