An important signal was heard from the financial sector this autumn. “We banks want to be the driving force in the fight against climate change,” announced the Association of German Banks. The commitment of the banks is essential for a sustainable transformation of the economy, because they grant the loans for the necessary investments. At the same time, banks have to deal with the issue of sustainability for their own survival, because “Climate and sustainability risks are financial risks”, the new coalition agreement says succinctly.
When granting loans or investing, the risk assessment of business models will play an increasingly important role. But: Are financial institutions well-staffed for good risk management?
Good risk management requires diversity, i.e. different perspectives, skills and experience in order to be able to evaluate and control possible uncertainties and dangers. In addition to natural disasters, this also affects political upheaval, technological developments, supply chains, pandemics and new regulatory frameworks.
It is questionable whether a team that consists solely of business economists or bankers can know about the breadth of risk factors when granting loans. The number of self-grown financial institutions is large, diversity in thinking is rather neglected in the industry.
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Scientific studies show that various management bodies have better risk management than homogeneous bodies. Specific events such as Brexit showed that board members with a higher proportion of women presented more comprehensive risk reports.
Philine Erfurt Sandhu is a lecturer at the Berlin School of Economics and Law.
(Photo: press photo)
There is a lot of catching up to do
Initial studies also show that a higher proportion of women on supervisory boards leads to a greater focus on sustainability in the company. Including different perspectives when assessing business risks is therefore extremely relevant for lenders and investors.
If the financial industry is shaped by people with similar résumés and ways of thinking, the question arises as to whether they can become effective drivers for the implementation of a sustainable financial system. Reliable diversity data is currently only available in Germany for the gender dimension.
The great pent-up demand becomes clear: In the 100 largest German banks, the proportion of women on executive boards is ten percent, at the savings banks it is only six percent women. The average proportion of women in the 20 largest fintechs is a meager three percent. We find a similar monoculture among investment companies in Germany: Of these, 76 percent did not have a single woman in the upper echelons in 2020.
It is true that the proportions of women do not say anything directly about the extent to which different experience and training backgrounds flow into decisions. However, a high gender homogeneity is an indication that the monoculture at the top has not been questioned enough so far and that there is a lack of permeability for various talents in the company.
It will be important for financial institutions to consider the issue of diversity right from the start in the great transformation of the economy. When assessing risks using the so-called ESG criteria, diversity is not only an aspect to be considered in the S for social and G for governance (leadership). Diversity is also a prerequisite for successful implementation of the topic, including the E for Environment.
More: ECB banking supervision wants to increase diversity in the management bodies of banks