Opinion

The Role of The Financial Sector in Addressing Social and Environmental Problems

The financial sector is closely linked to the environment and society. Environmental problems such as climate change, global warming and pollution pose serious threats on the sustainability of the financial sector. Similarly, social problems such as unemployment, gender discrimination and hunger among many others have a severe negative impact on the global economy. Given that, what should the role of the financial sector be regarding social and environmental issues?

Source: SourceSecurity

The Modern Financial Sector

The financial sector has evolved as a vehicle that channels funds from those who have a surplus in funds to those who have a shortage. It increases efficiency, allows people to share risk and provides capital owners with a return. Yet, the main role of the financial sector remains to ensure sustainable development of the economy through redirecting capital flows. The process of redirecting capital flows must take into consideration environmental and social issues among others in an attempt to meet the needs of an inclusive and sustainable economy. Clearly, our complex and dynamic world offers no “one-size-fits-all” approach towards effectively redirecting capital flows. Instead, the financial sector must recognize and balance critical priorities.

The United Nations Environmental Programme which operates under the umbrella of the United Nations presented in its article “The Financial System We Need” an estimate of the capital costs required to tackle some of the most challenging environmental and social issues. According to the report, US$27 billion are required annually to “ensure universal access to safe drinking water and adequate sanitation” (2015). Other alarming problems were green infrastructure, ecosystems and biodiversity, climate change, energy and food security. This demonstrates that achieving a more sustainable future requires significant investments. I firmly believe that it is the role of the financial sector to provide each issue with the ‘adequate’ amount of capital flows based on a thorough assessment of both the risk that each problem poses on the long-term health of the economy and the opportunity cost involved.

REFUTING THE SHAREHOLDER THEORY

Contrary to Sundaram and Inkpen’s (2004) view that “maximizing shareholder value” is the primary and only objective of managers, I am convinced that managers must consider all stakeholders -including the environment and society- in their decision-making process. Sundaram and Inkpen base their argument on five key reasons which suggest that the shareholder theory is the ‘best’ among all attainable options. In an attempt to further foster their statement, the authors disprove key concerns regarding the shareholder theory. For example, they refute the common belief that shareholder theory supports exploiting other stakeholders as it “offer[s] no basis for long-run value creation.” As a result, the authors believe that shareholder theory would increase the outcomes of several stakeholders. Nevertheless, I believe that their assumptions are flawed. First, considering shareholders and stakeholders as two distinct entities is wrong and misleading (Freeman et al 2004). Second and more importantly, shareholder theory offers managers an incentive to engage in unethical behavior as long as it maximizes shareholder value. This led to huge scandals such as Enron, Tesco and Volkswagen. Finally, the authors view fails to account for the “richer context of joint stake- holder relationships” (Freeman et al 2004) and the positive effects of Corporate Social Responsibility (CSR) on the financial performance of the firm. Supply Chain Management is evidence that stakeholders do not always have opposing interests. Of course, interests of stakeholders are not always the same. At that point, management must make to a decision taking all stakeholders into account. As Freeman et al pointed out, “managers need to use judgment more than ever” (2004).

Conclusion

CSR has proven to have a profound impact on the long-term financial performance of a firm. Based on empirical studies, giving back to the environment and society helped businesses achieve better brand reputation, led to a lower employee turnover rate and higher customer satisfaction (Galbreath 2010). Achieving a more sustainable future requires significant investments and I believe that the financial sector has a huge role to play. As mentioned above, it should direct financial flows to more sustainable areas such as the environment and society. This is supported by the stakeholder theory which underpins the financial sector’s responsibility towards all stakeholders. One of the main challenges remains finding financially viable investments which contribute towards a more sustainable development. In my opinion, technological advancements will have a positive impact in that respect.

References

Freeman, R. E., Wicks, A. C., & Parmar, B. (2004). Stakeholder Theory and “The Corporate Objective Revisited”. Organization Science, 15(3), 364-369. doi:10.1287/orsc.1040.0066

Galbreath, J., Dr. (2010). The Benefits of Corporate Social Responsibility: An Empirical Study.

Sundaram, A., A. Inkpen. 2004. The corporate objective revisited. Organ. Sci. 15(3) 350–363.

The financial system we need. (2015, October 30). Retrieved September 26, 2018

Written by: Marwan Darwish

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