The British writer Aldous Huxley once remarked that “perhaps the greatest lesson in history is that no one learned the lessons of history.” We don’t know for sure if the quote is genuine; however, it is clear that very often we fail in that fundamental subject that we may call the lessons of history.
In the mid-eighties the worst industrial accident in living memory occurred. A toxic gas discharge was released into the atmosphere from a pesticide factory in Bhopal, India, killing some 16,000 people. The disaster occurred, among other reasons, due to lack of equipment maintenance and negligence of the company’s management.
In response to this event, in addition to the enactment of new legislation related to industrial safety in developed countries, corporations began to demand the implementation of safety management systems in the different countries in which they operated. Despite this, the number of accidents did not decrease significantly.
Towards the beginning of the XXI century, some companies understood that to improve safety it was necessary to focus on the behavior and leadership of the people in the organization and not only on management systems. Procedures and policies can be very good on paper, but it is also important to have leaders who listen, understand, accompany and engage in dialogue.
Environmental and social risk management
At about the same time as the Bhopal disaster, multilateral development banks such as the World Bank and the Inter-American Development Bank began to assess, through due diligence assessments, the environmental and social risk of certain projects in which they planned to invest. From that moment on, investment risk included environmental and social components, which had possible reputational, legal or credit consequences. However, that process was done only for specific projects.
Towards the second decade of this century, multilateral banks began to request from their private financial intermediaries such as banks and investment funds, to implement management systems that address the risks of their credit portfolios. It was clear: poor management of the environmental and social risk of their intermediaries could impact them directly or indirectly. A recent example of this is the murder of Berta Cáceres, which has had legal consequences for all those involved: companies, intermediary banks and financiers.
These new management systems, abbreviated as ESMS, have emerged as the solution to this complex problem of risk management. But as already mentioned for industrial safety risk management, the desired results not only depend on a nice manual and many documents, but it is necessary to ensure adequate leadership and verification of the desired behaviors. This is one of the challenges facing financial intermediaries.
There are other key challenges, for example, recognizing that these issues are not only the responsibility of the institution’s sustainability department, that risk management does not limit the competitiveness of the business when the message to the client is clear and constructive and that, fundamentally, good risk management is not an obstacle, but a business opportunity.
The opportunity in sustainable finance
In the very short term, it will be necessary to place trillions of dollars for sustainable investments in the Latin American market. This picture should resonate with senior management of financial institutions in our region. The environmental and social issue no longer only means a risk for the institution, but an opportunity. It will be necessary to be creative to access international funds, design green or sustainable financial products and ensure that the ESMS is not seen as a constraint.
The history of industrial safety management, of around four decades, should help us recognize that good management in sustainable finance requires leaders who clearly establish and communicate their vision of sustainability.
It is necessary to address leadership in sustainable finance using the lessons of the Bhopal disaster. For example, translating the vision of sustainability into simple terms, accompanying direct reports to guide, listen and direct appropriately, when necessary, and verify that there are indicators that relate to productivity and the quality of internal verification processes. In this way we would have learned some lessons from history.