Financial services urged to create shared value

Postgraduate researchers from the African Institute for Financial Markets and Risk Management (AIFMRM) at the University of Cape Town (UCT) are challenging South Africa’s financial services to be more innovative in how they approach the creation of shared value to solve much-needed social and environmental challenges.

At a glance, South Africa may appear to be a financially inclusive country with 70% of adults having a transactional bank account, according to a report on sustainable financial inclusion from the Boston Consulting Group. However, dig a little deeper, and the numbers tell a different story. The South African financial services sector is often distrusted, has high transaction costs and is strictly regulated, creating barriers to financial inclusion. Moreover, while many South African firms, including financial services companies, score well on environmental, social and governance reporting, there is scant evidence that this is delivering the impact we need.

Now, a group of postgraduates from AIFMRM is challenging companies to shake up the way they are doing things and look afresh at how they might be able to create shared value and help solve some of South Africa’s more intractable social challenges.

Mobile technology

The team – made up of master’s students in risk management of financial markets – set out to investigate how financial services companies could track and measure their environmental, social and governance initiatives in a way that makes a more direct contribution to the creation of shared value.

Shared value is a business philosophy that calls for the leveraging of resources and innovation of the private sector to create new solutions to some of society’s most pressing issues.

“A company cannot succeed in a society that is failing,” says Mohapi Mohlamonyane, one of the co-authors of the study. “In a world where inequality is rising, businesses must acknowledge that in the long run, pursuing shared value is more sustainable than mere economic gain.”

A key finding of the research was that companies need a better framework for implementing and adjusting key performance indicators that relate to the organisation’s environmental, social and governance targets – and also to find more effective ways to link these to the aspirations of individual employees.

“A company cannot succeed in a society that is failing.”

Traditionally, companies have struggled to measure and report on environmental, social and governance factors let alone link these to personal employee goals, but the use of mobile technology offers new avenues to achieve this integration on an unprecedented scale. This research proposes a framework that makes use of an app to create easy access to both individual employees’ environmental and social aspirations and those of the organisation, allowing them to set shared goals and track their progress towards attaining these in real-time.

While the framework proposed by the students targets the financial services sector, it can be easily extrapolated to other sectors too.

Improving conditions for employees

Various activities could be logged on the app: from the amount of paper that was used each day, to the number of hours spent monitoring or mentoring bursary holders. Employees could also be encouraged to carpool by making visible the total air miles travelled for work or to reduce food waste by being able to order meals from the canteen from the day before.

The report points out that growing shared value in this way creates opportunities not only for the company to have a more significant impact on society, but also to help uplift and improve conditions for employees and that this does not have to come at the expense of profits.

Many studies have concluded that companies with high environmental, social and governance scores tend to generate higher returns and manage to lower both their idiosyncratic and systematic risks. A reason for this may be that companies with good environmental, social and governance scores are more competitive because they utilise their resources better; they develop their employees and strive for innovation and long-term growth. They are also better at risk-control, have higher standards when it comes to compliance and corporate governance, can manage resources and commodities better, and therefore suffer less from price change.

“There is a growing demand for companies to change their approach towards how they generate returns, and if they do not adapt fast enough, they might become extinct.”

“It is vital to measure environmental, social and governance initiatives as they provide the company with an indication of what risks they are exposed to, where untapped opportunities exist and how much they are contributing compared to their competitors,” says study co-author Dimitri Pavlou.

“There is a growing demand for companies to change their approach towards how they generate returns, and if they do not adapt fast enough, they might become extinct. Companies in the financial services sector have a special obligation – and opportunity – by virtue of their role in enabling capital allocation, financial inclusion and the redistribution of risk within an economy.”

Smarter financial solutions

By providing smarter financial solutions to small- and medium-sized business owners and farmers, for instance, or by adopting formal credit products that mimic the highly successful stokvel, financial services companies could increase the availability, affordability and usage of financial products and services, in a manner that is convenient to the financially excluded and unbanked.

An app could keep track of all of this while enabling companies to harness data for their integrated reporting. They can then publicly disclose their environmental and social returns and improve the quality of the information available to stakeholders, making the company more accountable in terms of a shared-value strategy.       

“To create shared value, we need to innovate.”

“Things need to change,” says Mohlamonyane. “Setting aside a portion of a company’s revenue to use in charitable donations is the old way of thinking about social responsibility, and merely doing this does not constitute shared value. There is so much more that can be done by South African companies to create shared value.

“We believe that the financial services sector is in a position to contribute to a more sustainable and inclusive South Africa, and our research, therefore, set out to challenge the sector to adapt and disrupt their current operating models. To create shared value, we need to innovate.”

• The report referenced in this article is entitled ‘Shared Value in Financial Services within a South African Context’ and was compiled by Lindi-Jane Janse van Rensburg, Ines Moussi, Mohapi Mohlamonyane, Dimitri Pavlou and Siphamandla Vilakazi. 

Dr Abhik Mukherjee is a senior lecturer at AIFMRM.