DFIs as Responsible Corporate Citizens
Sustainability, a recent trend in international development, has redefined how companies and financial institutions around the world do business. Whereas before, business actions were largely driven by profits, today, people and the environment are also important factors that influence business decisions.
Businesses and financial institutions are increasingly adopting sustainability as a priority for several reasons. First, globalization raised the bar for development goals. Now that people can more easily cross political boundaries, they can compare their present welfare against the potential they could have achieved. Second, information technology provided an important avenue for comparing the welfare of states, thereby enabling a better understanding of which development strategies and policies are most effective. Third, the nature of the prevailing corporate organization model has evolved. In the past, business models were predominantly oriented toward short term results such as profit and performance. Those short-sighted approaches ended in systemic failures, as demonstrated in the Asian Crisis of 1997 and the U.S. corporate scandals in the early 2000s.
As a result of these factors, many businesses and finance institutions have accepted sustainable development – manifested in a commitment to corporate citizenship – as their operative goal. Corporate citizenship is a way to engage in sustainable development. A corporate citizen is a business that voluntarily adopts its responsibility to social, economic and environmental goals of the national welfare.
Development banks, or development financing institutions (DFIs), have an important role to play in advancing the global sustainability agenda. They are set up by governments to provide credit to higher risk investment in the areas where commercial loans are otherwise hard to obtain such as long-term infrastructure projects or loans to small and medium-sized enterprises (SMEs). Due to their unique mandate, DFIs must operate according to the dual bottom line: achieving both financial sustainability and developmental impact. Sustainability of DFIs is therefore key both in its own right and as a part of good corporate citizenship.
Laws regulating most DFIs emphasize that they must reach out to SMEs on a large scale in both rural and urban areas, delivering more sophisticated financial services in addition to loans that small businesses may otherwise not have access to. However, because DFI loans are typically guaranteed by national governments, there is little incentive for DFI lenders to conduct due diligence of SME borrowers. In many cases, governments had to recapitalize DFIs when their capital accounts were eroded by operating losses and subsidized lending to SMEs. Hence DFIs have the difficult task of performing their outreach targets while remaining sustainable.
This Corporate Citizenship Manual for DFIs is designed to help development banks meet the challenge of sustainability, providing a comprehensive framework for how to design and implement corporate citizenship objectives in a sustainable way. Part I offers an overview of corporate citizenship, corporate governance, and corporate social responsibility (CSR). Part II identifies the benefits of CSR programs for DFIs, and Part III comprises a toolkit for DFIs to plan, implement, and monitor CSR projects.
Responsible Corporate Citizenship (RCC) involves the three Ps – people (social impact), profits (contribution to development), and planet (environmental protection) with a central role being played by governance and ethics. This simple framework suggests that sustainable development measured by a balanced triple bottom line (TBL) requires an institution to get its governance and ethical house in order. It is not possible – at least in the long run, for good CSR projects to come out of institutions that have governance and ethical issues of their own. Implementing this framework is of key importance for DFIs, many of whom are legally mandated to institutionalize CSR in their planning, operations and monitoring process.
Published Date: June 05, 2012