The Social Performance Task Force introduced international social impact standards for the financial sector back in 2012. Since then, they have found support from Luxembourg’s government and the Organisation for Economic Co-operation and Development, and several thousand financial firms.
The SPTF was founded in the US in 2005 and opened its Luxembourg office in 2019. SPTF staff and board members will be speaking at a conference organised by the international policy forum OECD later this week. “Finance United: Impact Investors, Financial Service Providers and the SDGs” takes place on Friday 30 September 2022.
Paperjam+Delano Finance spoke with Jurgen Hammer, managing director of SPTF Europe, ahead of the event. Here are 7 things we learned from the conversation.
1. Inclusive finance isn’t charity and it isn’t limited to the developing world
“Inclusive finance means giving access to financial services to all the people who are excluded. It’s as simple as that,” Hammer said in the interview. While the concept of inclusive finance started in the global south, “it’s not at all limited to the south, because there are many people excluded, even here in Luxembourg” and across Europe.
“If you live in the wrong neighbourhood or have the wrong name or whatever else in your records,” then you potentially can have problems accessing banking, insurance and payment services, and obtaining credit.
“We all know that many of them have fantastic capacities and initiative, and can make it, so it’s basically giving an opportunity,” he said. “It’s not a gift, it’s not philanthropy. It’s believing in them, giving them a chance, that’s what inclusive finance is.”
2. The Social Performance Task Force wants financial firms to adopt international standards , similar how IFRS accounting rules are used today
Hammer pointed out that for the past 40 years, sustainable finance has had to demonstrate two types of performance. First, that “it doesn’t have to be subsidised, people can pay back a loan... to have financial results,” he said. “But also have a social impact.”
“We know how to evaluate our financial performance, we have IFRS,” the International Financial Reporting Standards, which makes company accounts comparable in 167 jurisdictions around the world, including the EU.
Previously “every sector had different accounting systems, which led to the fact that nobody could read anybody else’s accounts, because you needed all the explanations behind” each unique system. That changed with the IFRS. “It’s maybe not perfect, but it helps us to understand what we’re talking about.”
A similar challenge emerged in social impact in the 1970s, 80s and 90s. “Everyone developed something on their own, which created a huge mess.” While many social impact measures were “well intentioned and very often very good,” the mishmash was missing “clarify, transparency, but also efficiency.” An organisation with four different partners might have to report social performance in four different ways, meaning “burden of reporting becomes totally disproportionate.”
In the 2000s, the Ford Foundation, one of the largest charitable endowments in the US, “I think was really, really visionary to say, we need to create a language, we need to describe kind of an IFRS of our social performance, which allows us to be transparent and evaluate” consistently.
Thus the SPTF was born as a forum for stakeholders, “to structure that discussion and help the sector to develop a language. That’s what we did. We started in 2005 and it look 7 years to come up with a proposal on how to structure social responsibility in a financial organisation.”
After the standards were published, the SPTF shifted focus. “We said, okay, now we have standards. We have a definition of what’s best practice... but what do we do with this?” A financial company “can write in their report that we adhere to those standards,” but that is a lightweight promise. “We need a way that we can measure where as an organisation we stand compared to those standards.”
SPTF partnered with the French NGO Cerise, which had an existing social audit tool used in microfinance. Cerise completely revamped its operations to include the wider social and environmental performance standards. The two NGOs then launched the Social Performance Indicator, which Hammer said has been used by around 1,000 financial providers.
3. The OECD conference is meant to bring more financial firms on board
SPTF has been working the OECD for a while, with the aim of showing how and why financial outfits should use the standards and audit tools.
“I think social performance and environmental performance is still very often seen as a compliance issue. It’s not compliance. It’s a change of strategy, it’s a change of management. It’s a process. It’s not just the reporting, ticking off [boxes]. That’s the danger sometimes,” Hammer said. “So that’s really what we want to try to learn and to share at the OECD conference... to show the complementarity in terms of implementation.”
4. It’s not only not-for-profits that have been expressing interest
Fund managers and other financial outfits have signed up for the conference, along with microfinance institutions, “and we have been approached by private banks in Europe, who are curious,” Hammer said.
5. The conversation around responsibility has changed pretty significantly since 2019
“The interesting thing is that we’re in a totally different world today than we were even four years ago, when we opened the office here in Luxembourg. Over the last four years, I think the topic of responsibility has totally changed dimensions. Until a few years ago, you could get away with” publishing a social purpose statement and supporting a foundation and then moving on. While good work was done, given the climate emergency, “that doesn’t work anymore.” The EU is rolling out its green taxonomy, which “everybody falls under”.
Pension funds have started taking a difference stance. Previously, many could not necessarily incorporate environmental or social objectives into investment policies, as their fiduciary responsibilities only took into account profits. Now, certain pension managers say “if I don’t integrate” environmental, social and governance (ESG) criteria “into my investment policy, I will get it wrong and I might not even have to pay out pensions because, you know, we might not be around anymore.”
6. The grand duchy is the smart place to promote social performance standards
Luxembourg “is a fantastic place” to drive change across Europe. The social segment is “small within the financial markets, but being small allows you to be a laboratory for new ideas. And Luxembourg does that.... In fact, in responsible finance, Luxembourg tested out things decades ago that now everybody talks about, but they were the front runners in Luxembourg.”
The SPTF is no longer funded by the Ford Foundation, having successfully met its original charter. Among the task force’s current backers are the grand duchy’s finance and development cooperation ministries.
7. Hammer doesn’t want governments to make the STPF standards obligatory, but thinks the guidelines are increasingly useful for officials
“No, it will never be compulsory,” Hammer stated. “What we would like is for central banks and financial regulators to use elements of what we have in their supervision” of financial institutions.
Central banks and regulatory agencies are not responsible for social impact, he observed. (As opposed to environment or social affair ministries.) They are focused on financial stability, liquidity, accounting rules, etc. However, some have started to “realise that certain aspects of governance, of client protection over indebtedness, transparency, of your staff, of work environments can be an element of risk, either reputational risk or real risk of market failure because I have over indebted clients and organisations.”
Some are starting to say, with an eye on “financial market stability, I might have an interest in verifying and asking for reporting on certain aspects.” Rather than creating a rulebook “from scratch,” the SPTF, Hammer said, has “20 years of work on responsible practices” that authorities can tap.
This article was published for the Paperjam + Delano Finance newsletter, the weekly source for financial news in Luxembourg. Subscribe using this link.