From impact calculators to SDG (UN Sustainable Development Goal) assessments, the sustainable finance industry has worked tirelessly to build quantitative tools that can report the positive impact that is delivered by companies in investment portfolios.
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Indeed, as set out in the Financial Conduct Authority's Sustainability Disclosure Requirements consultation paper, the ‘Enterprise Contribution' - the process of quantifying the sustainability outcomes delivered by investment assets - has become our industry's dominant way of meeting our clients' growing demand to ‘do good' as well as ‘make money'.
However, while we have rushed to embrace the positive actions of our investees, the finance industry as a whole has been a lot less willing to accept any connection to, or responsibility for, less positive corporate behaviours. This has recently been highlighted by the EU's new Corporate Sustainability Due Diligence Directive (CSDD).
At the centre of this new directive is a ‘corporate due diligence duty' which obliges companies to identify, end, prevent, and mitigate negative human rights and environmental impacts in their operations, subsidiaries and value-chains.
To the relief of the industry, the CSDD awarded financial services a (perceived) carve-out, meaning that investment portfolios (and other financial transactions) do not fall under much of the directive.
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While it is somewhat mitigated by the requirement for some funds to produce Principal Adverse Impact Statements under SFDR, this carve-out has proved to be controversial.
Citing frameworks like the UN Guiding Principles for Business and Human Rights, several UN bodies and the OECD argue that no sector should be excluded.
We agree that the carveout is problematic, and argue that the industry should consider portfolios as part of their value-chain.
Firstly, if we count the positives in our portfolio, surely it is only right that we should also accept the negatives. Secondly, it is only once we have acknowledged the world for being what it is that we can deliver the purpose of sustainable finance and work to make it better.
Let us explain with the example of modern slavery.
Last year, the Global Slavery Estimates showed that nearly 28 million people are held in forced labour across the globe. While the UN set a goal of eradicating forced labour and ending modern slavery by 2030, conflict and the pandemic have resulted in more people being exploited.
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The law is clear about the responsibility of financial services in key areas. The Proceeds of Crime Act 2022 requires organisations to alert law enforcement when customer activity is suspicious and may indicate money laundering or terrorist financing.
The Money Laundering Regulations 2017 require organisations to have relevant policies and controls in place. Human trafficking and modern slavery are predicate crimes for money laundering and the duty of financial services to act is clear.
But should organisations be using their leverage to do more? A group of banks, known as the Thun Group, started a debate on this over ten years ago, attempting to provide guidance on the implications of the UN Guiding Principles on Business and Human Rights for banks.
The key dilemma is whether a bank - and by inference an investment manager - should be considered as causing or contributing to adverse human rights impacts arising from its clients' operations. Eventually, it was acknowledged that there are circumstances under which the financial services they provide may contribute to a human rights harm.
Whether in those cases the banks should contribute to remedy is less clear.
What is clear is that such organisations, as providers of capital, have authority. This can be used to incentivise companies to act on slavery.
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Through engagement we can push companies to do more to find and fix modern slavery in their operations and help some of the world's most vulnerable people.
But to achieve this we have acknowledge its presence. To make change you have to embrace the bad. This is where good regulation can help.
At CCLA, we have been clear that our own Modern Slavery Act requirements should explicitly include the portfolios of financial institutions.
We hoped that we had convinced a previous minister of this and after a Westminster Hall debate two years ago, it felt tantalisingly close to government policy. But two years is a long time in politics.
We do not underestimate the challenge but we are convinced that modern slavery and human trafficking will never be abolished without the active participation of the financial services industry and that this requires us to recognise the bad as well as the good in our investee companies.
Whilst CSDD does not apply in the UK, our regulators can take adopt the same principle. It is time to make the provisions of the UK Modern Slavery Act explicitly include portfolios.
Sara Thornton is the consultant modern slavery at CCLA and James Corah is head of sustainability