SUSTAINABILITY: A STRATEGY-BASED PARADIGM SHIFT FOR FINANCIAL INSTITUTIONS IN NIGERIA.
By: Kayode Ashamu
Tags: Sustainability, Sustainable Development, Sustainable Finance, Sustainable Business, Climate Change

SUSTAINABILITY: A STRATEGY-BASED PARADIGM SHIFT FOR FINANCIAL INSTITUTIONS IN NIGERIA.

The concept of sustainable development has increased its popularity from one sector to another over the years. It is an ongoing process that has continued to spread (throughout all economic activities) with the financial institutions being pioneers.

The current economy in the developed world has demanded financial institutions to follow sustainability guidelines, in order to incorporate modifications experienced by societies in their ethics and moral codes to stay competitive in this era of the 21st century. Today, businesses no longer seek for profits alone but to also have a long-term environmental and social perspectives, which would be achieved by the mitigation of social and environmental related risk as well as innovative sustainable oriented business strategy (IFC 2007).

In order not to be left behind, the financial institutions in developing countries have taken a cue from this global trend in financing development; by incorporating international guidelines into their business processes and operations. This is in a bid to foster sustainable development which in turn would help in meeting up with the global benchmark of the sustainable development goals.

To this effect, the Central Bank of Nigeria in July 14, 2012 approved the adoption of the NSBP (Nigeria Sustainable Banking Principles) by banks, discount houses and development finance institutions in Nigeria. This was done in furtherance to the bankers’ committee’s commitment to deliver positive development-impacts in the society, while protecting the communities and environments. In order to enable effective implementation, the following documents were issued:

The Nigeria Sustainable Banking Principles. The Nigeria Sustainable Banking Principles Guidance Note. Nigeria Sustainable Banking Principles Power Sector Guidelines. Nigeria Sustainable Banking Principles Agriculture Sector Guidelines. Nigeria Sustainable Banking Principles Oil and Gas Sector Guidelines.

A successful implementation (through operations, enterprise risk management and other governance frameworks) of these principles and guidelines will ensure the development of a sustainable-based management approach that balances the environmental and social (E&S) risks identified with businesses, while ensuring that they remain environmentally and socially responsible in the pursuit of economic profit.

Current Situation of Development in Developing Cities: A case of Lagos State, Nigeria.

Currently, Lagos State is set to attain Africa’s model Mega city by 2025 (driven by ‘the smart-city’ ideology) according to its development plan. But the context in which business decisions are made is however characterized by complex and growing challenges relating to population growth, urban migration, poverty, poor waste management, destruction of biodiversity and ecosystems, pressure on food sources and prices, insecurity, lack of energy, pressured infrastructure and potential climate crisis. However, different developmental projects are being undertaken which in-turn have created a lot of environmental and social tensions (which often includes the displacement of people, livelihoods, etc). Thus, posing new forms of risk to financial institutions as they are uniquely positioned to be blamed or to further economic growth, development opportunity as well as enhance innovation and competitiveness in Nigeria through its lending and investing activities with the adoption of the sustainable guidelines.

Therefore, for financial institutions to be relevant in today’s business, it is highly mandatory to strategically harness business model with the sustainable development goals in mind. To accomplish this, there’s an urgent need for the financial institutions to holistically re-assess their:

- financing or banking operations and activities,

- credit process,

- enterprise risk management and governance frameworks,

- supply-chain,

- stakeholder’s management framework,

- corporate social responsibilities,

- customer preferences and behaviors.

The concept of Sustainable Finance: A review from literature

The implementation of sustainability initiatives as well as some financial projects were mainly done through the management of social and environmental risks in strategic decision-making, lending and the identification of opportunities for innovative product-development in areas related to sustainability, utilizing specific keywords (IFC 2007, 12). The literature is embedded in varieties of key words: social, ethical, community based, microfinance, alternative, environmental, sustainable and solidarity banking and finance according to Milan (2012, 21). A unified definition for this type of finance is not really available and perhaps not possible because of the different traditions from which ethical finance actors have emerged (de Clerck 2009, 4).

However, in the likes of this growing demand, the initiatives of the financial sector across the globe following sustainable business models is increasing. “Conscious consumers, ethical investors, enlightened businesses, non-governmental organizations, cultural creations, and leading international institutions are working to make the triple bottom line (People, Planet and Profit) a reality” (de Clerck 2009).

According to Marcel 2001, the role of banks in contributing towards sustainable development through the likes of corporate social responsibility and social finances, is however potentially enormous because of their intermediary role in an economy and their important impact on the economic development of Nations.

Hence, financing sustainable projects provides financial capital and risk management products only to projects that promote and do no harm to economic prosperity, environmental protection and social justice (Forum for the future 2002, 3). Any financial institution would be staying long in business- thus fulfilling the requirements of the International Finance Corporation, globally and in Nigeria, the Central Bank of Nigeria, if the alignment of financial system with sustainability criteria entails:

● Social sustainability: Ensures to always respect the internationally recognized human rights. It improves the welfare and living standards in the community where activity is based (IFC 2007).

● Financial sustainability: Availability of the financial institution and its clients to contribute to the development in a long-term perspective.

● Economic sustainability: Economic viability of the institution and the financed projects and therefore their contribution to economies and societies.

● Environmental sustainability: Preservation of natural ecosystems and resources.

These considerations taken together, aim to capture a fuller range of factors that influences activities to include social and environmental impacts of their work. Therefore, if a financial institution wants to bring to reality the objectives of the Sustainable Development Goals in developing countries, it needs to:

Firstly; re-address its business strategy to have an attitude that involves sustainability criteria in a whole business system.

Secondly; ensure their strategic plans are based on sustainable monitoring systems, where sustainable innovation plays an important role in the process of the company’s development.

It is now a must for financial institutions to drive initiatives through ‘social financing’ to show ethical commitment through social empowerment of marginalized groups and environmental sustainability. Their products, services and activities are to be fashioned to focus on:

● Providing valuable services to marginalized groups which would provide a bedrock for local economics (Amin et al 2002).

● Bridging the gap between ethical investors and borrower organizations aiming to create social, cultural and environmental value (Buttle 2007).

● Higher economic profitability or at least maintaining profitability using CSR and social financing as a source of competitive advantage (Vogel 2005).

● Forming of global competitive advantage or marketing tool to stay globally relevant to attract foreign attention and benefits (Perini et al. 2006).

● Using this new global business strategy to gather the ability to influence the company’s image through the provision of capital (de Clark 2009).

Considering the above, sustainability in finance is positioned to only drive full priority to environmental sustainability whilst pursuing social and economic sustainability on the road to sustainable development.

Reviews from financial institutions on the impacts of sustainable finance on business performance:

1. “The role of banks in contributing toward sustainable development is, however, potentially enormous, because of their intermediary role in an economy. Banks transform money in terms of duration, scale, spatial location and risk and have an important impact on the economic development of nations.”- Marcel (2001).

2. “Sustainable energy finance has increased our bank’s visibility and market differentiation in a highly competitive domestic market.”- Ladislav Dvorak, Head-Special Products for SMEs, Ceska Sporitelna

3. “Financing micro-hydro stations is a good alternative for Armenia, where atomic energy has been a major supply of power. Microhydro started as a small project but turned out to be a catalyst for establishing an entire line of business in renewable energy finance. A small investment grew into a new financial product that differentiates us in the Armenian market. We attract new clients, get repeat business, and are thinking about financing other renewable energy areas.”- Arsen Bazikyan, Deputy Director.

4. “With a high concentration of industry in the region, UralTrans Bank understands that cleaner production and energy efficiency technologies are key factors determining competitive advantage. We have responded by developing financial product lines to help industry take advantage of these technologies. Collaboration with international financial institutions is our major competitive advantage and proof of the bank’s strong performance.” — Sergei Netepenko, Senior Auditor and Manager Investor Relations UralTrans Bank.

5. “IFC provided substantial and more importantly, timely support in the process of integrating sustainability considerations into our credit approval process. The bank has made a giant step forward in its development.”- Vikto Gorbachev, Director of Credit Department, Bank Aval.

6. “In 2004, we became the first Romanian bank to introduce an environmental procedure to assist corporate lending activity. This was based on EBRD procedures and IFC operational policies regarding social and environmental concerns and worker safety. We support our customers in developing environmental friendly businesses and ln learning how to comply with environmental, health and worker safety regulations.”- Nicolae Danila, CEO- Banca Comerciala Romana.

7. “It is my firm belief that sustainable microfinance is an important tool for economic growth at the grassroots level and a powerful tool in the fight against poverty. IFC has been a valuable partner in helping us become a full-fledged commercial bank that brings critical financial services to ordinary entrepreneurs and families in urban as well as rural areas.”- In Channy. Founder and GM- ACLEDA bank.

8. “Our approach to social transformation through BEE has resulted in new business opportunities which present themselves because of a paradigm shift in our business, our industry, and our society. We are developing new products and services for a market that was previously not our radar screen, to the benefit of all.”- Marlene Hesketh, Head- Transformation of First Rand Limited

Acknowledgement: I Acknowledge

- the input of Olaniyi B. Olalemi (Audit assurance and risk management practitioner with about 19 years’ experience).

- the input of Taibat Lawanson (Professor of Urban and Regional Planning).

- the review of Rukayat Alli-Oluwafuyi (an Environmental Sustainability expert) and Adewumi Odedina (a Petroleum-Field Engineer and Marine technical expert).

References

Amin, Ash, Angus Cameron and Roy Hudson. 2002. Placing the Social Economy. London: Routledge

Blanca Fernandez Milan. Sustainable finances and personal Attitudes. http://www.modul.ac.at. 28 may 2012.

Buttle, Martin (2007). ‘‘I’m not in it for the money: Constructing and mediating ethical reconnections in UK social banking’. Geoforum 38 pp. 1076–1008.

David J. Vogel. Is there a market for virtue? The business Case for Corporate Social Responsibility. Brookings Institution Press, 2005.

De Clerck, Frans (2009). ‘Ethical Banking’. In Zsolnai Laszlo / BodaZsolt / Fekete Laszlo ‘Ethical Prospects: Economy, Society and Environment‘ (319). UK: Springer.

Forum for the Future (2002): ‘Financing the Future: The London Principles of Sustainable Finance’ Available: http://www.forumforthefuture.org.uk — retrieved 12 March 2012.

International Finance Corporaton (IFC) (2007).‘Banking on Sustainability: Financing Environmental and Social Opportunities in Emerging Markets’. Available: http://www.ifc.org/ — retrieved 12 March 2012.

Jeucken, Marcel H. A. (2001). ‘Sustainable Finance and Banking: The Financial Sector and the Future of the Planet’. UK: Earthscan Publications.

Perini, F. Albareda, L., Tencati, A & Lozano, J.M. (2006). The government’s role in promoting corporate responsibility: A comparative analysis of Italy and UK from the relational state perspective. Corporate Governance 6(4), 386–400.