- Best practices in social and environmental safeguards become more urgent during pandemic
Two new studies by the Inter-American Development Bank show the positive financial impacts for investors, companies and banks that take gender, environmental and social factors into their decision-making.
Both studies were carried out in Chile. The first one looked at gender discrimination in loan approvals by bank officers and the second compared the performance of investments in instruments that comply with environmental, social and governance factors (ESG). The studies found widespread gender discrimination in loan approvals, and that investing in ESG instruments offered solid returns when compared to their non-ESG counterparts.
“There is a widespread misconception that gender and environmental policies are expensive or unprofitable,” said IDB Chief Economist Eric Parrado, who took part in both research projects. “This is wrong. Investing in instruments that are based in good environmental and social principals is the right thing to do morally and financially”.
Researchers looked at investments by Chile’s pension and sovereign funds. For pension funds, they found that in most cases the return of the ESG portfolio exceeds that of the fund’s average allocation. Using four global equity indexes and three global fixed income indexes, they found that ESG indexes often outperformed their conventional counterpart in terms of cumulative returns.
Researchers note that ESG investing can also avoid large financial and reputational costs. Better management of ESG risks often implies better management. Firms with good ESG practices are better able to avoid potential disasters and are better positioned to recover when disasters do occur.
In the gender report, researchers asked a group of male and female prospective borrowers to randomly request loans to a group of male and female loan officers representative of the financial sector in Chile.
It found that loan requests submitted by women are 18.3 percent less likely to be approved when compared to equivalent loan requests submitted by men, even though official statistics show that women in Chile have higher repayment rates than men.
Researchers estimated that the median forgone profits associated to applications rejected due to gender discrimination amount to $1,785 or 23% of the median loan size. They provide evidence suggesting that gender discrimination against female borrowers is due to taste-based sources. They also found that banks with a larger proportion of male oﬃcers are associated with larger levels of discrimination against women, and this is in terms of both response and approval rates.
“Banks can make be more profitable if they root out gender discrimination in their loan decisions,” said Parrado. “This is even more true during the pandemic, when banks are deciding emergency loans. The coronavirus is the ultimate economic stress test. Ignoring best practices in gender discrimination and social and environmental safeguards can worsen inequality and economic performance.”
The Inter-American Development Bank is devoted to improving lives. Established in 1959, the IDB is a leading source of long-term financing for economic, social and institutional development in Latin America and the Caribbean. The IDB also conducts cutting-edge research and provides policy advice, technical assistance and training to public and private sector clients throughout the region.