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«INQUIRY WORKING PAPER 15/03 August 2015 The UNEP Inquiry The Inquiry into the Design of a Sustainable Financial System has been initiated by the ...»

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Bringing the voice of the

citizen into finance







The UNEP Inquiry

The Inquiry into the Design of a Sustainable Financial System has been initiated by the United Nations Environment

Programme to advance policy options to improve the financial system’s effectiveness in mobilizing capital towards a green and inclusive economy—in other words, sustainable development. Established in January 2014, it will publish its final report in October 2015.

More information on the Inquiry is at: www.unep.org/inquiry or from: Ms. Mahenau Agha, Director of Outreach mahenau.agha@unep.org.

About this report This Working Paper has been developed as a contribution to the UNEP Inquiry by a working group ‘The Vienna Group of Citizens’ that came together through the Institute for Social Banking (ISB) international summer school on the role of the citizen in banking in July 2014.

The working group includes participants from seven European countries working in social banking, civil society, business and academia. They also drew on their global networks including meeting with the Board of the International Association of Investors in the Social Economy (INAISE), the Secretariat of the Federation of European Ethical and Alternative Banks (FEBEA), and co-hosting a workshop with the Global Alliance for Banking on Values (GABV).

The paper is intended to stimulate discussion. The views expressed in this paper represent those of the authors and do not necessarily represent those of the host institutions or funders.

Project lead: Malcolm Hayday, formerly General Manager, Institute for Social Banking and founding chief executive, The Charity Bank Limited and Jen Morgan, Founder, Finance Innovation Lab Writing Team: Jean-Pierre Caron, Melanie Gajowski, Radek Halamka and the above Working group: Fabio Costantini, Bruno Iserbyt, Christa Maier, Gerhard Pischinger, Adrian Sachse, Denise Weiss, and Peter Quarmby With support from: Patricia Ciecierski of the Institute for Social Banking Comments are welcome and should be sent to simon.zadek@unep.org.

Acknowledgements This report draws on the individual and collective inputs of all of the working group, as well as surveys conducted in Czech, English, French, German and Italian, and interviews with influencers from the values based banking sector (See much more detail in the Annex). The authors are grateful for the inspiration and knowledge given to us by these networks, while taking responsibility for any possible misconceptions. The report also benefited from the invaluable inputs of peer reviewers drawn from practitioners from values based banks, regulators, citizens, social entrepreneurs and watchdogs including Paula Martin and Peter Blom (GABV), Celso Grecco (Founder Brazilian Social Stock Exchange), Ian Cobbold, (retired Bank of England and FSA regulator), Rod Ashley (Chief Executive, Airdrie Savings Bank), Dominique Lesaffre (outgoing president, INAISE), Thomas Jorberg (Vorstandssprecher, GLS Bank), Christophe Nijdam (Secretary General, Finance Watch) and Ben Quinones (chairman Asian Solidarity Economy Council).

Copyright © United Nations Environment Programme, 2015 Disclaimer: The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the United Nations Environment Programme concerning the legal status of any country, territory, city or area or of its authorities, or concerning delimitation of its frontiers or boundaries.

Moreover, the views expressed do not necessarily represent the decision or the stated policy of the United Nations Environment Programme, nor does citing of trade names or commercial processes constitute endorsement.

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UNEP Inquiry/Vienna/ISB/FiL 3 Values Based Banking Foreword – by the Vienna Group of Citizens The initiators of this report came together at the 2014 Institute for Social Banking (ISB) International Summer School which had as its core theme the role of citizens in banking. We realised that the majority, if not all of the responses to the UNEP Inquiry on the Design of a Sustainable Financial System would come from institutions rather than from those at the very heart of any financial system: the citizen.

It can be argued that recent evidence of mis-selling, market-rigging and other bad-faith activities in the banking sector as well as its failure to provide financial services for all are evidence that the voice of the citizen is rarely heard either within banks or by those who regulate them.

We believe it is essential that citizens’ voices are heard. We are confronting profound challenges caused at least in part by the way large parts of the financial system have served their own short term selfinterest at the expense of the real economy and everyman and woman. A sustainable financial system must be shaped with citizens at its heart.

Grameen Bank founder Muhammad Yunus urges us to consider whether our bank is worthy of our custom, not the other way round. Only by rebuilding trust will banking earn the recognition by citizens of the enormous societal value it can generate. Today the world remains unconvinced while many senior bankers remain in denial. Yet there are values based banks already designing financial products and services to address social and environmental needs, invest in the real economy and find ways to bank the unbankable. These banks are also operating profitably and growing their market share.

The question we set out to explore with others was “How does values based banking support a green economy?” However, before addressing the ‘greening’ of the financial system we need to state what we mean by sustainability. We believe it goes beyond ensuring that we are able to maintain the status quo with our energy intensive, consumer driven needs. Sustainability refers to the whole ecosystem, an interconnected web with a vast and rich diversity of species, of which humanity is only one part, and a high degree of inter connectedness. New economic and financial models are required which respect and support the ecosystem of which we are a part and which include care of the soul as a part of care of the planet.

In order to gather collective intelligence we carried out interviews, surveys, workshops and one-to-one meetings. We have engaged with some of the most respected influencers working to develop a more responsible, democratic and fair financial system. The process of inclusive action research has been important not only in gathering information but in building a movement for change. It is self-evident that we cannot represent citizens as a whole but we see this report as a prototype for further citizens’ engagement in similar discussions about the financial system.

This report argues that values based banking has the potential to be a powerful channel for citizens’ voices in finance, enabling people to make more active and informed decisions about their financial needs and their choices of their financial services providers. It highlights diverse examples and new thinking, shares knowledge on approaches and solutions outside of the mainstream of banking and finance, and explores the case for policy change.

Values based banking demonstrates a different way of operating, which to date has been at a small scale, compared to the giants of banking. Bolder leadership from both political and business leaders is necessary to scale up its impacts, but active citizen engagement is also of crucial importance.

UNEP Inquiry/Vienna/ISB/FiL 4 Values Based Banking Values based banking, which includes customers in its governance and operating system is the pivotal actor around which new socio-economic institutional arrangements can be built. Values based banking is purposively oriented towards the development of a values based economy which embraces the image of sustainability outlined above.

We welcome UNEP’s intention in holding this Inquiry and trust that its Directors will recognise that the old paradigm lies in pieces having failed to make the world more inclusive or sustainable. It is time for a new paradigm: establishing a clear link between profit and social purpose, having the ability to measure it, and putting the citizen at the heart of the financial system. We believe that values based banking is the pivotal actor in the development of a values based economy.

We acknowledge that our simple vision is challenging and that there needs to be a transition period but we believe that only a financial system built upon values of sustainability, transparency, diversity/fairness and inclusion can deliver a step change in the financial system’s effectiveness in mobilising capital towards a green and inclusive economy.

We hope that the UNEP Inquiry, as well as our own networks and communities will adopt, respect and champion the recommendations and, that the UNEP Inquiry will include the voice of the citizen in their final report.

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UNEP Inquiry/Vienna/ISB/FiL 5 Values Based Banking Summary Today’s financial system is in many ways too large, too complex, and too removed from the real economy. It has become focused on short-term profit maximisation, it does not pay enough attention to social and environmental risks, and it leaves 2.5 billion people without access to adequate or any financial services.

Banks play an important role in the economy intermediating between savers and borrowers. As such the role banks can play in contributing to or undermining sustainable development is profound. Values based banking is purposively oriented towards the development of a sustainable economy. It is a diverse movement drawing in community banks, ethical, green and socially oriented banks and including cooperatives, credit unions, privately owned banks, B Corporations and public companies. Values based banking is not determined by organizational form but is characterised by a culture and performance

model based on:

 Economic, social and environmental performance as a ‘triple bottom line’.

 Serving communities and the real economy and enabling new business models.

 Long term relationships with clients and a direct understanding of their economic activities.

 Long term, self-sustaining resilience to outside disruptions  Transparent and inclusive governance Values based banks have understood something that is missing in mainstream banking: that banking is a combination of responsibility for society and making reasonable profit to generate fair livelihoods. They have demonstrated that this approach can be well-governed and profitable, achieving success on both narrow financial measures as well as broader social, economic and environmental impacts.

We identify four values that need to be at the heart of a sustainable, or values based financial system:

sustainability, transparency, diversity/fairness and inclusion.

To achieve its potential, values based banking has to broaden its outreach and diversify its portfolio by catering to stakeholders of both a values based economy and a market-oriented one. The paper

highlights key channels for scaling up the impact of values based banking:

1. Growing the values based banking sector

2. Influencing mainstream banks to adopt sustainable strategies

3. Building capacity of civil society to catalyse change and hold the system accountable

4. Educating and engaging consumers

5. Accounting for environmental and social impacts

6. Creating policies and regulations aligned to sustainable finance

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1 R. Davies, P. Richardson, V. Katinaite, and M. J. Manning (2010). Evolution of the UK banking system. Bank of England Quarterly Bulletin, Q4.

2 L. Gambacorta, J. Yang and K. Tsatsaronis (2014). Financial structure and growth. BIS Quarterly Review, March 2014.

UNEP Inquiry/Vienna/ISB/FiL 7 Values Based Banking The current perception of the financial system, including “The opportunity for a new banking is that the system as such is selfish, driven by shortfinancial system at this point in term profit maximization and subverted by greedy managers.

time is the ongoing This might be true in part but it would be short sighted not to look at the overall role of the financial system in supporting dissatisfaction with the the needs of the real economy. Although banks today are not financial system” seen as great innovators, significant innovations over time have undoubtedly enhanced the common good. These include the development of insurance, mortgage loans, microfinance, pensions, invoice discounting and the ability to hedge genuine currency and commodity risks.

In this section we examine the current challenges facing the financial system (and banking in particular) which set the scene for needed innovations and responses from both within and outside of the mainstream of financial institutions.

1.1 Who does banking and the financial system serve?

The first challenge in developing a financial system that is aligned with the needs of sustainable development is to ensure it is truly inclusive. An economy is not sustainable in the long term if it excludes people or communities.

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