Finance and poverty: the future of social investment

Decades ago, many companies assumed some type of social action , in addition to their purposes as an economic actor. This function was brought together in corporate social responsibility (CSR) , a set of social actions combined with a look at the negative impacts of each company. Without underestimating the projects carried out and the debates opened by CSR, I consider that, as a vector of effective change , its influence on the company has been limited. CSR has not penetrated to the heart of the business model, questioning and having the ability to alter the most harmful practices for society or the environment. There has been too much ‘marketing‘and few deep, effective and measurable transformations.

The novelty of recent years comes from the hand of another acronym with three letters, sustainable investment or ESG (environmental, social and good governance) . I will not fall into the naïveté of thinking that what was not achieved with CSR will simply be achieved with ESG. That said, its potential for systemic change is greater, especially in relation to the fight against climate change.

Almost 40% of global financial assets will have some type of ESG characterization by 2025 , and there are already funds targeting specific sectors with a firm will to transform them to decarbonize parts of the energy and production system. The morass of indices, guides and standards that have emerged in this field has led the European Commission to prepare an “ESG taxonomy” in which it details what is and what is not a sustainable investment and where it orders the technical and political criteria that will define the non-financial report of European companies . So that investors and consumers know what is really behind beautiful colors. What happens is that while in the green taxonomy the ‘E’ It is very advanced, the ‘S’ is late and with deep debates within it.

It is not surprising that this is so. The financial sector has assumed climate change as a major risk for its investments. At the same time, the EU has made decarbonisation and the preservation of biodiversity a central objective of its plans and budgets . There are opportunities for green business and an immense need for technological advancements . That said, the urgency should not be less to move decisively on the ‘S’. If the situation was already tough for people living in precariousness and poverty, the pandemic has exacerbated inequality and thrown tens of millions of people into misery. Societies are in tension, the credibility of institutions is weak and transitions to a green economy cannot be made without protecting the most vulnerable.

Recently, the European Commission platform to promote sustainable investment has launched a discussion paper on the social issues covered by ESG . Unlike the environmental one, based on scientific and quantifiable criteria, the investment with social impact follows international agreements on human rights. And it takes the SDGs as a frame of reference for positive action.

The proposal has a vertical component where those financial assets that are directed to health, education, housing , protection, financial inclusion and basic infrastructures are characterized, with the aim of guaranteeing a dignified life and more cohesive societies . It is not enough to finance these sectors to be considered an investment with a social impact. This must be done by ensuring affordable universal access adapted to each social and cultural context. For example, investing in a pharmaceutical company that produces vaccines would not be ‘per se’ a social investment, until decisive and measurable action is demonstrated to make vaccines accessible to the entire population . The same for housing.

The EU sets the standards to be followed in sustainability and the fight against poverty

The investment needs are immense. The United Nations estimates the funding required to achieve the SDGs at around $ 5 to $ 7 trillion annually . A significant part, especially in sectors such as education, must come from the public sector. That said, the private sector can and should contribute, in partnership with the public, to facilitate access to housing or to provide basic social services. A good example is the growth of ‘social bond’ issues from $ 20 billion in 2019 to $ 147,000 in 2020 . Bonds whose return is associated with the results of innovative social programs aimed at the inclusion of vulnerable sectors.

The other component of the social taxonomy is the horizontal one that refers to the action of any business entity as a whole. It includes decent employment throughout the value chain, non-discrimination, occupational and product health and safety, respect for human rights and relationships with customers, suppliers and communities where the company operates. The reference framework to establish positive standards and ‘do no harm’ are international agreements such as ILO conventions , the UN guides for companies and human rights , and what is included in the social pillar of the EU, which includes social protection. and continuous training.

Finally, this report enters into an aspect that straddles the ‘S’ and ‘G’ of government: that of taxation, essential to ensure an effective contribution of corporations to the common good. The note is timid in this case, with generic references to transparency, non-aggressive tax planning and taxation in the countries where the company does business .

It is urgent. Poverty and extreme inequality cannot wait

As happens on other occasions, the EU sets the standards to be followed by other economies in relation to sustainability and the fight against poverty. Soon, European companies will have to report against these standards . The first proposals in relation to social investmentthey make sense, although they require more ambition when it comes to fighting inequality, putting distribution —pre and post— at the center of the economy. You can see the fear of always dealing with the accumulation of wealth, resources and power by quasi-extractive and technological monopolies. The risk is to end a CSR + in the field of the ‘S’. That said, welcome is the advance that will serve to direct more funds towards the good and to clarify what is and what is not social investment, thus helping those who operate with more demanding standards such as impact investing or ethical banking .

It is urgent. Poverty and extreme inequality cannot wait. Fewer still can endure social face-washing by certain companies that exploit everything they touch. The European Commission is heading in the right direction.