UNEP-FI PRINCIPLES FOR RESPONSIBLE BANKING AND THE CBN CODE OF CORPORATE GOVERNANCE: IMPROVING ON
THE CORPORATE GOVERNANCE DISCOURSE IN NIGERIA
THE CORPORATE GOVERNANCE DISCOURSE IN NIGERIA
On 22 and 23 September 2019, the United Nations Environment Programme - Finance Initiative Principles for Responsible Banking ("UNEP FI Principles") were launched by 130 banks from 49 countries, representing more than US$47trillion in assets. The UNEP FI is a partnership between UNEP and the global financial sector created in the wake of the 1992 Earth Summit with a mission to promote sustainable finance. More than 200 financial institutions, including banks, insurers, and investors, work with UNEP FI to understand today's environmental, social and governance challenges, why they matter to finance and how to actively participate in addressing them.
Though not restricted to environmental matters, at the national banking sector regulatory level in Nigeria, there is a Central Bank of Nigeria ("CBN") Code of Corporate Governance for Banks and Discount Houses in Nigeria. This Code took effect on 1 October 2014 and it superseded the Code of Corporate Governance for Banks in Nigeria Post Consolidation, 2006. This Code is aimed at entrenching effective corporate governance practice by facilitating the creation of a structure that works for the benefit of stakeholders through ensuring that the enterprise adheres to accepted ethical standards and best practices as well as formal laws.
This paper seeks to evaluate the UNEP FI Principles and the Code of Corporate Governance by identifying areas of convergence and divergence as they relate to issues of responsible banking and adherence to acceptable ethical standard and best practice; as well as benefits that Nigerian Banks can derive from adhering to the UNEP FI Principles.
B. HIGHPOINTS OF THE PRINCIPLES FOR RESPONSIBLE BANKING
These Principles provide the framework for a sustainable banking system and help the bank industry demonstrate how it makes a positive contribution to society. The main reason advanced to banks to become a signatory to the UNEP FI Principles, is that the principles provide support for these banks to leverage on business opportunities in this era of sustainable social, environmental and economic development, and to manage emerging risks associated with this new operating environment. The Principles are:
Principle 1: Alignment
For purposes of responsible banking, Strategic Alignment means gearing a bank's strategy towards being consistent with and contributing to the Sustainable Development Goals (SDGs), the Paris Climate Agreement and other relevant national, regional or international frameworks, such as the UN Guiding Principles on Business and Human Rights, where a bank is best positioned to do so through its business. These frameworks articulate globally agreed goals and challenges for building a more sustainable future. By aligning its strategy with society's goals, the bank shows that its business, the product, and services it provides, can support a sustainable future while achieving long-term business benefits. It signals that the bank accepts its shared responsibility for shaping and securing the future.
Principle 2: Impact and Target Setting
In line with the Principles for Responsible Banking Framework Documents, this Principle requires banks to undertake an analysis of their impact on society, the environment and the economy, to identify their most significant impacts. The bank's impact analysis should be based on (1) scope: the bank's core business areas, products/services across the main geographies that the bank operates in, (2) scale of exposure where the bank's core business/major activities lie in terms of industries, technologies, and geographies; (3) context and relevance: the most relevant challenges and priorities related to sustainable development in the countries/regions in which it operates; (4) the scale and intensity/salience of (potential) social, economic and environmental impacts resulting from the bank's activities and the provision of products and services.
Principle 3: Clients and Customers
Banks are vital economic intermediaries and as such can make their most significant contributions to society's by creating synergies with customers and clients, encouraging sustainable practices and accompanying their customers and clients in their transition towards more sustainable business models, technologies and lifestyles. In addition to contributing towards shared prosperity for current and future generations, enabling sustainable economic activities in this way present a clear business case for banks: clients that are shifting to sustainable business models and technologies are better prepared for emerging regulations, and better positioned to succeed in our changing economy and society. Accompanying their clients in their own journeys to contribute to society's goals enables stronger relationships with customers and clients; and positions the bank as the partner of choice. Further, getting to know the bank's customers and client's better drives business growth and supports improved risk management. A strong relationship between the banks and its client and customers-built on trust-is crucial for any bank's success. Responsible conduct is the foundation of trust.
A bank's most significant impacts on society, the economy, and the environment, are indirect. They are associated with the activities of the bank's clients and customers. Partnering with clients and customers is an essential element in assessing the bank's impacts, understanding risks and opportunities, and achieving targets.
Responsible conduct means treating clients and customers fairly, understanding their needs and providing products and services that meet these needs, giving them key product information to enable comparison shopping, transparent pricing, and putting in place customer complaints and dispute resolution mechanisms.
Principle 4: Stakeholders
Collective action and partnership are required to meet the scale of change necessary to meet the objectives of the SDGs, the Paris Climate Agreement and other relevant national, regional or international framework. By partnering with relevant stakeholders (notably peers, investors, clients, customers, regulators, employees, policymakers, suppliers, scientists, academia, civil society, trade unions, and communities, banks can significantly increase the impact of their actions and support action at the scale of change that is required. Proactively consulting stakeholders ensures your bank benefits from their knowledge and subject-matter expertise and enables the correct/legitimate definition of society's goals; it drives legitimacy and capacity to identify positive and negative impacts. Proactively engaging stakeholders early on ensures that all relevant interests are considered, and a bank will not encounter challenges down the line.
Principle 5: Governance and Culture
One of the main principles for responsible banking, is the principle of governance and culture. It requires establishing a daily business culture and practice in which all employees understand their role in delivering the bank's purpose and integrate sustainability in their work and their decision-making. To deliver on its commitments under these Principles, a bank needs to put in place effective governance procedures pertaining to sustainability, including assigning clear roles and responsibilities, setting up effective management systems and allocating adequate resources.
In line with the Principles for Responsible Banking Framework Documents, banks are required to develop governance structures that enable and support effective implementation of the Principles. This includes having appropriate structures, policies, and processes in place to manage its significant impacts and risks and achieve its targets. Banks are also required to disclose measures it is implementing to foster a culture of responsible banking among its employees.
Principle 6: Transparency and Accountability
This principle seeks to ensure that Banks are accountable to their employees, investors, and society as a whole. Public disclosure is critical because it enables internal and external stakeholders to assess the bank's contribution to society, and the progress it is making. This, in turn, helps build confidence in the bank's sustainability-related commitments and helps to distinguish the bank from its competitors. Making targets public and reporting progress significantly increases the potential for success in achieving them. Progress reports are key to ensuring the effectiveness of the bank's approach, motivating employees, competing with peers, driving innovation, and strengthening reputation and trust.
C. COMPARISON OF THE UNEP FI PRINCIPLES AND THE CBN CODE OF CORPORATE GOVERNANCE FOR BANKS, 2014
It is important to understand the legal premise of the UNEP FI Principles and that of the CBN Code of Corporate Governance. The Principles for Responsible Banking is an international agreement or instrument put together by transnational actors aimed at ensuring that the financial sector particularly banks make positive contribution to society by financing business opportunities that are socially sustainable, capable of promoting environmental and economic development.
The 2014 Code (the "Code") is a revision of the 2006 Code that was issued by the CBN pursuant to its statutory powers as conferred by Central Bank of Nigeria Act and the Bank and other Financial Institutions Act. The reason for the revision is that it was observed that certain provisions could not be implemented by banks because of their ambiguity and/or conflict with the provisions of the Companies and Allied Matters Act (CAMA) 1990. There was also the need to update the code in order to align it with contemporary development and international best practices, hence the current Code.
The Code provides clear guidelines on all aspects of governance and is expected to enhance corporate governance practices for banks in Nigeria. The provisions of the Code represent the minimum standard with which banks shall comply. Banks are however encouraged to aspire to higher standards and in this case, the UNEP FI Principle is a good reference point.
In terms of board and management of banks in Nigeria, the Code charges the board to be accountable and responsible for the performance and affairs of the banks. Importantly, the board is required to define the bank's strategic goals, approve long and short-term business strategies and monitor implementation by management. The Code also deals with the size and composition of the board, separation of powers, appointment and tenure of board members, board committees, board meetings, remuneration, and board appraisal. A review of Principles 1 and 5 of the UNEP FI Principles, shows that it is similar to these provisions of the Code. Banks are required by Principle 5 to put in place effective governance procedures pertaining to sustainability, including assigning clear roles and responsibilities, setting up effective management systems and allocating adequate resources. By complying with Section 2 of the Code, Nigerian banks are essentially complying with Principle 5 of the UNEP FI Principles which deals with governance and culture.
It the constituted board and management of the Bank that is responsible for gearing a bank's strategy towards being consistent with and contributing to, the regional or international best practices, where a bank is best positioned to do so through its business. Essentially, the bank will be complying with Principle 1 of the UNEP FI Principles. Further, it is the board and management of the Bank that will undertake an analysis of the impact of the bank's business activities on society, the environment and the economy; as well as identify their most significant impacts.
Central to the regulation of the banking sector in Nigeria, is the protection of the investment of shareholders and the interest of stakeholders. The Code provides for the rights and functions of shareholders, equity ownership, protection of shareholders' rights, meetings, shareholders' associations and the rights of other stakeholders (i.e. creditors, customers, employees, host communities and the general public. Principle 3 of the UNEP FI Principles emphasizes that Banks partnering with clients and customers is an essential element in assessing the bank's impacts, understanding risks and opportunities, and achieving targets. Principle 4 further requires Banks to partners with relevant stakeholders (notably peers, investors, clients, customers, regulators, employees, policymakers, suppliers, scientists, academia, civil society, trade unions and communities, and by so doing significantly increase the impact of their actions and support action at the scale of change that is required. To the extent that Nigerian banks have put in place internal processes that mirror the provisions of Section 3.0 of the Code, they can be said to comply with Principles 3 and 4 of the UNEP FI Principles and international best practices.
The CBN Code has elaborate provisions on disclosure, transparency, and accountability. In order to foster good corporate governance, banks are encouraged to make robust disclosures beyond the statutory requirements in Banks and Other Financial Institutions Act (BOFIA) 1991 as amended, Corporate and Allied Matters Act and other applicable laws.
There is an obligation to have a structure to independently verify and safeguard the integrity of financial reporting. There is also a duty to put in place a risk management framework specifying the governance architecture, policies, procedures and processes for the identification, measurement, monitoring, and control of the risk inherent in its operations. Similarly, Principle 6 of the UNEP FI Principles requires its signatories to be accountable to their customers, employees, investors, and society as a whole. Vital to this obligation is public disclosure because it enables internal and external stakeholders to assess the bank's contribution to society, and the progress it is making.
There is no question or doubt as to what the UNEP FI Principles for Responsible Banking seek to achieve, not just in the area of responsible banking and corporate governance, but in the area of the environment and the economy as a whole. At a time when green finance is gaining momentum, financial experts and market participants are ensuring that financial investment flows into sustainable development projects, initiatives and environmental products, it will not be out of place for the CBN and even Nigerian banks to work towards implementing or incorporating the Principles into the corporate governance regulatory scenery in Nigeria.
Considering the overwhelming support enjoyed by the UNEP FI Principles and the forum where it was enacted, these Principles have the potentials of attaining notoriety similar to or that even supersede the Equator Principles. Nigerian Banks seeking to join their foreign counterparts on a syndicate financing transaction may be required to be signatories of the UNEP FI Principles or show evidence of compliance with the Principles before they can participate in the transaction.
Ikemefuna Stephen Nwoye Esq.
Principal Chief Counsel -NWOYE (Barristers & Solicitors)
with research assistance from Miss Eberechukwu Ezeokeke who interned with the Firm.
Disclaimer: This paper should not in any way serve as a substitute for legal advice or opinion. The views expressed are personal to the author and do not necessarily reflect the views of any organisation or person that the author is or might have been affiliated to.
 Section 2.1.1 of the Code.
 Section 2.1.2 of the Code.
 Section 2 of the Code.
 Section 5.1.1 of the CBN Code.
 Section 6.1.1 of the CBN Code.
 The Equator Principles (EPs) is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in projects and is primarily intended to provide a minimum standard for due diligence and monitoring to support responsible risk decision-making. The EPS apply globally to all industry sectors and to four financial products (1) Project Finance Advisory Services (2) Project Finance (3) Project-Related Corporate Loans and (4) Bridge loans. See The Equator Principles - https://equator-principles.com/about/ for more details (accessed on 17 October 2019).