IN THE FIELD OF TECHNOLOGY DEGREE PROJECT
MECHANICAL ENGINEERING AND THE MAIN FIELD OF STUDY INDUSTRIAL MANAGEMENT, SECOND CYCLE, 30 CREDITS STOCKHOLM SWEDEN 2020,
The Relationship between United Nations’ 17 Sustainable
Development Goals and Swedish Banks’ Credit Rating of
Manufacturing Customers
MARTIN GUSTAFSSON
PATRIK ZYTOMIERSKI
IN THE FIELD OF TECHNOLOGY DEGREE PROJECT
VEHICLE ENGINEERING
AND THE MAIN FIELD OF STUDY INDUSTRIAL MANAGEMENT, SECOND CYCLE, 30 CREDITS STOCKHOLM SWEDEN 2020,
The Relationship between United Nations’ 17 Sustainable
Development Goals and Swedish Banks’ Credit Rating of
Manufacturing Customers
MARTIN GUSTAFSSON
PATRIK ZYTOMIERSKI
The Relationship between United Nations’ 17 Sustainable Development Goals and Swedish Banks’ Credit Rating of Manufacturing Customers
by
Martin Gustafsson Patrik Zytomierski
Master of Science Thesis TRITA-ITM-EX 2020:273 KTH Industrial Engineering and Management
Industrial Management
Förhållandet mellan FN:s 17 Hållbarhetsmål och Svenska Bankers Kreditvärdering för Kunder inom
Tillverkningsindustrin
av
Martin Gustafsson Patrik Zytomierski
Examensarbete TRITA-ITM-EX 2020:273 KTH Industriell teknik och management
Master of Science Thesis TRITA-ITM-EX 2020:273
The Relationship between United Nations’ 17 Sustainable Development Goals and Swedish
Banks’ Credit Rating of Manufacturing Customers
Martin Gustafsson Patrik Zytomierski
Approved
2020-05-28
Examiner
Tomas Sörensson
Supervisor
Tomas Sörensson
Commissioner
Auxality AB
Contact person
Kevin Gelotte
Abstract
The sustainable development of the section providing financing within Swedish banks are going through major challenges and changes. The United Nations is constantly working on improving sustainable directives within all industries to ultimately reach all 17 sustainable development goals that have been set up for a more sustainable world. Banks are in a unique position where they have a high indirect impact and influence over all other sectors and in relation all 17 sustainable development goals through their business. This can be seen in the two largest sectors within banking, investing and financing. While sustainable investing has been widely researched and developed, sustainable finance can still be considered in an early phase of development. By implementing sustainable factors to the credit management process of borrowers, banks can aid global sustainable development. This thesis has researched the relationship between United Nations’ 17 sustainable development goals and the credit rating of four Swedish commercial banks through. Special focus has been given to borrowers in the manufacturing industry. The results show that Swedish banks have initiated sustainable development within their credit rating analysis; however, they are still undergoing continuous improvements and additions. The process and extent of sustainable factors differentiates for all banks. Nonetheless, no bank has a special framework for measuring sustainable risk in the manufacturing industry. Because of the banks’ general process, this thesis concludes that there are no clear advantages nor disadvantages to being sustainable when applying for a loan from Swedish banks. Even though the banks argue that sustainability is both important and included in the credit rating process, the empirical data gathered suggests that the most important and significant factor remains how financially solvent a company is.
Keywords: Sustainability, ESG, Credit Rating, Sustainable Development Goals, SDG,
Examensarbete TRITA-ITM-EX 2020:273
Förhållandet mellan FN:s 17 Hållbarhetsmål och Svenska Bankers Kreditvärdering för Kunder inom
Tillverkningsindustrin
Martin Gustafsson Patrik Zytomierski
Godkänt
2020-05-28
Examinator
Tomas Sörensson
Handledare
Tomas Sörensson
Uppdragsgivare
Auxality AB
Kontaktperson
Kevin Gelotte
Sammanfattning
Hållbar utveckling av finansieringsavdelningen inom svenska banker genomgår stora utmaningar och förändringar. FN arbetar ständigt med att förbättra hållbara direktiv inom alla branscher för att i slutändan uppnå alla 17 mål för hållbar utveckling som har fastställts för en mer hållbar värld. Bankerna är i en unik position där de har en hög indirekt påverkan och inflytande över alla andra sektorer och i förhållande till alla 17 mål för hållbar utveckling genom sin verksamhet. Detta kan ses i de två största affärsenheterna inom bank, investeringar och finansiering. Även om hållbara investeringar har varit föremål för forskning och utvecklats i stor utsträckning, kan hållbar finansiering fortfarande sägas vara i en tidig utvecklingsfas.
Genom att implementera hållbara faktorer i kredithanterings processen för låntagare kan banken hjälpa till global hållbar utveckling. Denna uppsats har undersökt förhållandet mellan FN:s 17 mål för hållbar utveckling och kreditbetyget för fyra svenska affärsbanker. Särskilt fokus har givits låntagare i tillverkningsindustrin. Resultaten visar att svenska banker har initierat en hållbar utveckling inom sin kreditprocess; emellertid genomgår processen fortfarande kontinuerliga förbättringar och tillägg. Processen och omfattningen av hållbara faktorer skiljer sig åt för alla banker. Ingen bank har dock en särskild rutin för att mäta hållbarhetsrisker i tillverkningsindustrin. På grund av bankernas allmänna process drar vi slutsatsen att det inte finns några tydliga fördelar eller nackdelar med att vara hållbara när de ansöker om ett lån från svenska banker. Även om bankerna hävdar att hållbarhet är både viktig och ingår i kreditprocessen, tyder vår undersökning på att den för företag viktigaste faktorn fortfarande är hur ekonomiskt stabilt ett företag är.
Table of Content
1 Introduction 1
1.1 Problematization 5
1.2 Purpose 5
1.3 Research Question 6
2 Method 7
2.1 Qualitative Research 7
2.2 Theoretical Review 8
2.3 Interviews 9
2.4 Protocol 9
2.5 Validity and Reliability 10
2.5.1 Process 11
2.5.1.1 Risks 11
2.5.2 Coding 12
3 Theory and Literature Review 15
3.1 Sustainability 15
3.1.1 Environmental Sustainability 16
3.1.2 Social Sustainability 17
3.1.3 Governance Sustainability 17
3.1.4 The United Nations 17 Sustainable Development Goals 18
3.1.5 United Nations SDG Directive 18
3.2 Manufacturing Industry 20
3.2.1 Swedish Steel Manufacturers 21
3.2.2 Manufacturing Sustainable Perspectives 22
3.2.2.1 Raw Material 23
3.2.2.2 Production 24
3.2.2.3 End Product 25
3.3 Financial Industry and Sustainability 27
3.3.1 Financial Industry Sustainable Perspectives 28
3.3.1.1 Indirect Perspectives 29
3.3.2 Credit Management 30
3.3.2.1 Credit Rating 31
3.4 Rating Agencies 32
3.4.1.1 Sustainalytics 33
3.4.1.2 RepRisk 34
3.4.2 Credit Rating Agencies 35
3.5 Theories Concluded 35
4 Empirical Finding 40
4.1 Background Data 40
4.1.1 Questions 41
4.2 Interview Findings 41
4.2.1 Bank 1 41
4.2.1.1 Credit Rating Process 41
4.2.1.2 Credit Rating and the SDGs 42
4.2.2 Bank 2 44
4.2.2.1 Credit Rating Process 44
4.2.2.2 Credit Rating and the SDGs 45
4.2.3 Bank 3 47
4.2.3.1 Credit Rating Process 47
4.2.3.2 Credit Rating and the SDGs 48
4.2.4 Bank 4 50
4.2.4.1 Credit Rating Process 50
4.2.4.2 Credit Rating and the SDGs 52
4.2.5 Sum of the Banks 54
5 Analysis & Discussion 56
5.1 Sustainability 56
5.1.1 Environmental Sustainability 57
5.1.2 Social Sustainability 58
5.1.3 Governance Sustainability 58
5.1.4 The UN’s 17 Sustainable Development Goals 59
5.2 Credit Rating Process 60
5.3 Manufacturing Industry 62
5.3.1 Environmental, Social and Governance Aspects 62
5.4 Methodology 64
6 Conclusion 65
List of Figures
▲ Figure 1: The Three Pillars of Sustainability
▲ Figure 2: Impacts from the Manufacturing Industry
▲ Figure 3: Illustration of the Qualitative Study.
▲ Figure 4: Process of Coding
▲ Figure 5: Three pillars of Manufacturing Industry
▲ Figure 6: Factors that are affected by extraction of material
▲ Figure 7: Factors that are affected by production
▲ Figure 8: Factors that are affected by the end product
▲ Figure 9: Sustainable Banking Commitments
▲ Figure 10: The Credit Management Process
▲ Figure 11: Risk Exposure Analyzed
▲ Figure 12: Theories Concluded
▲ Figure 13: SDGs importance for Bank 1
▲ Figure 14: Including SDGs at Bank 1
▲ Figure 15: SDGs importance for Bank 2
▲ Figure 16: Including SDGs at Bank 2
▲ Figure 17: SDGs importance for Bank 3
▲ Figure 18: Including SDGs at Bank 3
▲ Figure 19: SDGs importance for Bank 4
▲ Figure 20: Including SDGs at Bank 4
▲ Figure 21: SDGs importance summed up
▲ Figure 22: Including SDGs summed up
▲ Figure 23: Credit Rating Process
List of Tables
■ Table 1: Forms of Validity and Reliability
■ Table 2: Keyword and Themes used when coding
■ Table 3: UN’s SDG
■ Table 4: Interview Questions
List of Abbreviations
CO2 Carbon Dioxide
CRA Credit Rating Agency
EAD Exposure at Default
ESG Environmental, Social & Governance
EL Expected Loss
EU European Union
KYC Know Your Customer
LDG Loss Given Default
LIED Loss in the Event of Default
PD Probability of Default
SDG Sustainable Development Goal
SRA Sustainability Rating Agency
UN United Nations
Acknowledgement
We would like to thank all interview participants who gave us a piece of their valuable time during the Covid-19 pandemic and following high workload for corporate loan officers. Moreover, we would like to thank our supervisor Tomas Sörensson along with all the seminar participants for their valuable feedback and input which polished our report. Lastly, we would like to thank our commissioner Auxality AB who constantly challenged us to do more and be better.
Martin Gustafsson’s degree project in the field of technology is for mechanical engineering and Patrik Zytomierski’s degree project in the field of technology is for vehicle engineering. Both have the main field of study industrial management.
1 Introduction
The following chapter will introduce the identified problem and subsequent subject of this thesis.
Sustainable development is generally discussed, thereafter the connection to both the manufacturing and the financial industries are presented. Lastly, the purpose and research question of this master’s thesis is stated.
Research regarding sustainability is increasing in popularity. Olawumi & Chan (2018) performed a study where they measured the current research trend by analysing 2094 web of science bibliographic records. Their study shows that there has been a steady increase in the number of published articles regarding sustainability within almost all major sectors during the recent decade.
The most commonly used definition of sustainability comes from the Brundtland Report which states that “sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” (Brundtland, 1987).
Sustainability is usually conceptualized from three pillars: Environmental, Social and Economic (Lozano, 2008). Even though the pillars are fundamentally different, they are connected and affect each other (Purvis, et al., 2018). A common visual representation of the three sustainability pillars are three intersecting circles with sustainability at the centre, as depicted in Figure 1. Purvis, et al., (2018) tried unsuccessfully to find a conceptual origin as well as a theoretically solid definition of the three pillars. They argue that the three circles concept has gradually emerged from early economic academic literature that included both social and ecological problems. Consequently, the diffuse origin and nature of sustainability bring about different schools of thought regarding what to include in the three pillars (Purvis, et al., 2018).
Figure 1. Environmental, Social & Economical aspects, the three pillars of sustainability based on Purvis, et al. (2018).
The United Nations recognized the importance of sustainable development and globally common goals to unify the planet. Therefore, the 2030 Agenda for Sustainable Development was created in 2015. The agenda is defined as a plan of action for people, planet and prosperity and includes 17 Sustainable Development Goals (SDGs) (UN General Assembly, 2015). The 17 SDGs are integrated and indivisible and meant to correspond to and include the three pillars of sustainable development. To that end, the UN General Assembly (2015) declared that “we are determined to take the bold and transformative steps which are urgently needed to shift the world onto a sustainable and resilient path.”
The general development of the manufacturing industry comes from sustainable requirements as well as from external pressure and demands from customers and politicians. Atz, et. al. (2019), show that practitioners and investors can in fact obtain financial benefits by implementing sustainability strategies and processes. Moreover, companies that do not follow the sustainable requirements can be the subject of increased fines further negating the financial benefits.
Companies can reduce costs, increase revenues and avoid unnecessary risks (Atz, et. al., 2019).
New innovations in the manufacturing industry tend to be very expensive to implement and come with a lot of risks of not succeeding. Nonetheless, sustainable strategies give long term financial benefits and have a positive impact on sustainable aspects.
Moreover, the general development can be derived from either a market driven or technology driven point of view. Both drives are important, yet their effect on businesses can be substantially different. Even though new and efficient technology emerges, there are no guarantees for widespread success if the market is not interested. A perfect example of a niche industry within the manufacturing industry that is getting a lot of attention is the automotive industry. Electrical and hybrid vehicles are increasingly taking market shares, with approximately 26,000 registered electric cars and light trucks in Sweden 2019, compared to 1,600 in 2013 (Starn, 2019).
Further, the entire supply chain must meet specific requirements for a vehicle to be considered sustainable. The motivation from the market has partly a positive effect on the entire industry, as the vehicles are composed of steel components produced by the manufacturing industry regardless of type of engine. Development within the manufacturing industry has led to both lighter and stronger parts, using lesser raw material. The demand of sustainable products and the supply from for example Tesla Motors has changed the automotive industry. The long-term survival for an automotive company is entirely dependent on them being sustainable (Kuhnert & Stürmer, 2018).
The National Institute of Standards and Technology (NIST) has analysed and classified sustainable perspectives for manufacturing industries with different subcategories (Chen, Kim & Leong, 2012).
NIST’s classification has been used by companies to measure their sustainability performance as well as by several academic studies when explaining and understanding the effects of each sustainable perspective (NIST, 2016). Joung et al, (2012) presented a classification of the three sustainability pillars and their impact on manufacturing industries, visualized in Figure 2.
Figure 2. Environmental, Social & Economical factors affected by the Manufacturing Industry, by Joung et al (2012).
In order for the manufacturing industry to develop, capital and financiers are needed. Industrial changes are influenced and governed by financial institutions, such as banks, who provide the capital needed for organizations to exist (Mezher, et al., 2002; Scholtens, 2008; 2011; Weber, Diaz
& Schwegler, 2014). That is, banks wield a considerable influence on society dependent on which markets, sectors and projects they choose to provide financing and capital. By extension, banks can influence projects towards increased sustainable friendly businesses.
In many cases, the three sustainability pillars affect each other. Just as they can amplify each other, so too can they counteract the impact of each other. There are several instances in which the strive to achieve one pillar of sustainability will hinder development of another. Egbue (2012) discusses the social impact derived from the increased production of lithium batteries for electric vehicles.
More recently, there is a large debate in Sweden regarding companies that pay dividend distribution to their stock owners while they simultaneously receive government aid for having their employees on furlough, as exemplified by Volvo Cars. By doing so, Volvo Cars economic sustainability is increased. However, there are social sustainability impacts to the company’s employees as well as the community as a result (Winberg & Lagerström, 2020).
According to Weber (2005), sustainability events become more valuable in new management practices within the financial sector. The correlation between sustainability and financial performance has been researched extensively and with contradictory results. Margolis and Walsh (2001) suggest that the correlation is negative, while Wagner, et al,. (2001) suggest that there is no correlation. However, most research has come to the conclusion that sustainable business has a
Aerts, Cormier, and Magnan 2008; Cubas-Diaz & Sedano, 2018; Cui, et. aj, 2018). To this end, Weber, Scholz & Fenchel, (2008) claim that the positive correlation is broadly accepted and applicable. Consequently, sustainability should be taken into consideration when predicting future financial performance (Weber, Scholz & Fenchel, 2008, 2010).
Before banks issue loans to companies they evaluate the chances that the companies are able to repay the loan, with the worst-case scenario being that the company defaults on the loan (Treacy
& Carey, 2000). The evaluation performed by the bank usually includes a combination of an internal evaluation and an external evaluation performed by a credit rating agency (CRA) (Nakamura & Roszbach, 2018). A strong predicted future financial performance is thus closely related to better rating and therefore lower interest on loans. All four Swedish major banks claim to have incorporated ESG into their business (Handelsbanken, 2020; Nordea, 2020; SEB, 2020;
Swedbank, 2020). However, there exist no regulations on how they have to incorporate sustainability as it does in some emerging markets (Oyegunle & Weber, 2015). Swedish banks are in fact in the forefront of sustainable development regarding green bonds and sustainable mutual funds (SSFC, 2019). Nonetheless, it seems as though the financing section is lacking in their loan departments (Oyegunle & Weber, 2015). All four Swedish major banks claim to have recently performed sustainability changes to their credit process in their 2019 annual report; nonetheless, without further disclosure on how the implementation has been performed. Moreover, all four banks claim to actively work for the world to reach the UN’s 17 SDGs (Handelsbanken, 2020;
Nordea, 2020; SEB, 2020; Swedbank, 2020).
Financial institutions measure the sustainable impact of a company or a business with criteria from three different aspects, environmental, social and corporate governance (ESG). That is, company sustainability is about the business model and how products and services are able to aid sustainable development. In consequence, the intent behind ESG measurements is to determine how sustainability can affect the future financial performance of companies (Nordea, 2020; Swedbank, 2020). Thus, the impact of the manufacturing industry is visualised through the three sustainability pillars. However, it is measured from an ESG perspective.
Moreover, publicly available data from one major credit rating agency show that sustainability factors only led to changes in their final credit rating for 3 % of the published companies (Fitch Ratings, 2019). This is in direct contradiction to above studies who claim a positive correlation between sustainability and financial performance. In connection, sustainability can, and should, be further included into credit management analysis to better predict the probability of default for potential debtors (Weber, et al., 2005; Weber, et al., 2008; Weber, et al., 2010; Weber, et al., 2015;
Cui, et al., 2018).
However, even though most banks are signatories of voluntary sustainability codes of conduct, they are not transparent about the inclusion of sustainability to their credit management process (Oyegunle & Weber, 2015; Weber, Acheta & Adeniyi, 2016). Some research argues that banks are
sustainable companies. On the one hand, the companies themselves are responsible for their business. On the other hand, they could not accomplish their day-to-day work if they did not possess capital. In consequence, if banks adopted an increased sustainable responsibility, they could help prevent sustainability linked problems such as climate change.
The banking industry in Sweden is aware of the part they have to play in the shift toward sustainability. One Swedish bank states that they have a key role in creating economic drivers necessary for future sustainable development. Consequently, they further state that the transformation towards sustainable development will occur quicker if banks take action (SEB Group, 2018).
1.1 Problematization
Requirements to find new sustainable solutions increases globally and within every industry. The manufacturing industry has a major impact on sustainable development for all three measurable aspects, Environmental, Social and Governance. However, without capital, the manufacturing industry is tied to low budget solutions which do not favour sustainability. Instead, it is required that financiers such as banks lend manufacturers the capital, and thereby resources and opportunity to build and develop new sustainable solutions (Weber, Diaz & Schwegler, 2014).
That is, the manufacturing industry stands in front of challenges that can only be managed or solved through additional investments. However, there will not be any financiers if they do not expect to gain financial profit. The financial sector base their loans and credit rating on the debtors ability to repay the loan, as the financial sector wishes to maintain a maximal financial profit on their outstanding debt by a low default rate and subsequent credit loss. The market demand for sustainability makes it crucial for the future survival of companies, as exemplified by the automotive industry (Kuhnert & Stürmer, 2018). Consequently, the accuracy of the financial industry’s prediction of default should be connected to sustainable measures. Moreover, there exists a reputational risk, or reward, for being able to communicate sustainable inclusion to shareholders and other external stakeholders.
Thus, the lack of sustainable criteria in the credit rating process affects banks external financing (Oyegunle & Weber, 2015). Thereby in relation, the manufacturing industry’s incentive to overcome sustainable requirements with the help from new technical solutions is also affected. If we are to reach the 17 SDGs, we need to further incorporate them to high impact decisions, such as the financing of companies. The lack of sustainable criteria in the credit rating process is affecting society’s shift towards sustainability. It is also affecting the financial industry’s credit rating accuracy. Lastly, it is affecting the incentive for the manufacturing industry to push for sustainable development.
1.2 Purpose
Sustainable solutions in the manufacturing industry are very relevant for the financial sector in the
choose to incorporate sustainability to their credit management. Therefore, the purpose of this paper is to evaluate to what extent and relevance the SDGs are currently incorporated within the credit rating process of Swedish banks. The implications of financing sustainable development can aid the solution to a sustainable future. Also, the Swedish automotive manufacturers will be analysed since it works as a good representation of how manufacturing industries are related to Swedish banks.
There is a lack of coherence in past research regarding social sustainability within manufacturing (Fantini, et al., 2014). Moreover, corporate governance sustainability is equivalent for multiple business industries. Research beyond available academic papers on social and corporate governance in manufacturing will not be included. Therefore, the thesis will be limited to reduced social and corporate governance sustainability, while the environmental sustainability will be amplified.
1.3 Research Question
What is the impact of a manufacturing company’s compliance with United Nations’ 17 SDGs on their credit rating with Swedish banks?
2 Method
In this section, the methods used are presented. It is described how a qualitative research and theoretical review is combined in order to collect and analyse data. Also, credibility and ethical consideration are discussed to ensure the quality of this paper. Lastly, the research process for the theoretical review and the interviews are presented.
2.1 Qualitative Research
The extent of sustainable impact cannot be measured by quantitative questions of yes or no. Instead, a qualitative assessment of what degree of sustainability is needed. Therefore, this thesis will follow a qualitative approach where the bank’s credit rating process will be analysed on a qualitative holistic level in accordance with sustainability criteria. Furthermore, the research method for this thesis will consist of a combined empirical qualitative study and a theoretical review. The theoretical review will stand as the basis for the available academic knowledge of sustainable development within both the financial and manufacturing industries, further explained in the following chapter.
First, available literature and theories will be gathered regarding how manufacturing companies invest in sustainable development. Afterwards, available literature and theories will be gathered regarding how financial institutes such as banks incorporate sustainable behaviour into their credit management processes. Additional information will be gathered from the banks’ own annual reports and subsequent sustainability reports. By gathering information relevant for the purpose of this thesis, questions for the future interviews can be formulated. Based on the literature, questions were formed, related to this thesis, to fit gaps or problems where the theoretical information was unclear or not investigated enough. Thereafter, interviews will be conducted with bank employees familiar with the bank's internal credit management system and sustainability related questions.
This research method is illustrated in Figure 3.
The information gathered from the interviews will be compared to and contested respectively to each interview and to the available literature and theories. To ensure trustworthiness and credibility, comparison between the different resources of interviews, annual reports and the literature need to be triangulated. In order to do this, the interviews combined with each annual report will be the core empirical information source of this thesis, with the theoretical review to either strengthen or challenge the arguments. To further ensure the validity of the interviewee and bank’s respondents, the empirical information will be combined and compared with the corresponding public information available in the annual sustainability report. By following such an approach, this thesis will gather information from three different sources regarding the same subject.
The general gathering of data will follow an inductive approach as the understanding of the industries and their sustainable development will increase throughout the theoretical review and empirical gathering process (Heath & Tynan, 2010).
Figure 3. Illustration of how the Qualitative Study of this thesis is conducted.
Another way of conducting this study could be to do a quantitative study by gathering and analysing Big Data. The same theoretical review would have to be performed in order to get a brief understanding and a background of the subject, but it would be more balanced towards quantitative data of the banks. For example, how many loans or what credit rating each and every bank of Sweden has, and make a quantitative analysis of that data. However, due to the confidentiality and the struggle to get every bank involved in such data would be problematic and almost impossible.
Many banks keep this information internally in order to maintain competitiveness and advantages towards their competitors. Therefore, the chosen method was the presented qualitative study as it is believed to be best suited for the purpose of this thesis and has the highest probability to succeed.
2.2 Theoretical Review
The theoretical review will be based on articles, websites and various academic literature. Cross references from databases such as Web of science, Google Scholar and KTH Primo will make it possible to construct a basis of knowledge within the area of this thesis. Keywords will be used that are deemed relevant to the manufacturing industry, financial credit management process, rating agencies and Swedish banks. By using variations of the same keyword, the chance to encounter a relevant source will increase. The corresponding results will then be analysed thoroughly to pinpoint and highlight the most relevant sources. If this search method gives too many (or too few results), it will be narrowed down (or broadened) to ensure that enough knowledge is presented before the interview question can be constructed. Furthermore, a backward snowballing approach
2.3 Interviews
The interviews will be conducted with bank employees that have the knowledge of how the banks manage their credit rating and the overall credit management process. The aim of the interviews is to get a deeper understanding of how Swedish banks are working with sustainable development and credit rating. It is assumed that the available information in the theoretical review may be lacking transparency due to bank secrecy, whereas direct interviews may give a fairer and more accurate picture.
Interviews will be conducted as teleconferences with employees at four Swedish banks. The reason behind the number of banks interviewed is because of the limited amount of Swedish banks available with the customer base or the routine of large investments in the manufacturing industry.
At first, it will be ensured that the participants work with a topic related to this study, such as sustainability, business loan or the credit management division. They can either have a position there or have suitable tasks within such fields. This is ensured in advance when searching for an interview to secure relevance for this thesis. Following each interview, the interview will be transcribed and coded with references to certain themes and keywords. All interviews will be anonymized whereby no names or titles will be mentioned in the interviews or later on in the thesis.
At the end of each interview, the interviewee will fill in a protocol to rate their corresponding bank’s belief of importance and inclusion of the 17 SDGs to the credit rating process. Every interview is estimated to take approximately 20-30 minutes. In order to prepare the interviewees and to get as accurate protocol results as possible, information about the theme of the interviews will be given ahead. Thus, the interviewee knows and can be certain of how their bank operates.
The interviews will follow a semi-structured approach as they include open-ended questions about the area and processes. Semi-structured interviews are a great way to get a deeper understanding of the subject. The questions are written as either follow-up questions to the public information available, and to find gaps in available literature. As mentioned, a theoretical review needs to be done before questions are constructed whereas the questions are presented in Table 4. However, along with more conducted interviews, more information and knowledge will be discovered, thus better and deeper follow-up questions will be asked of the interviewees if the opportunity occurs.
Furthermore, according to Creswell (2009) semi-structured interviews also involve the interviewee more which can potentially make them talk freely which will raise the interview’s credibility.
Interviews should be conducted at several different banks in order to increase the data validity and to get a broad, general knowledge and understanding. In general, a positivist approach will be taken as well as following an interview guide. This will further allow interviewees to take their own initiatives. Moreover, it will heighten the accuracy of the study and not prevent interviewees to share knowledge that otherwise would be of relevance.
2.4 Protocol
At the end of each interview, a protocol will be given to the interviewees of which they should mark which situation their bank is in. The protocol will include two sets of questions, one in regard
through seven (7). The second regarding how much the bank believes that they include each of the 17 SDGs in their credit rating process on a scale from zero (0) through (7). The two sets of questions are chosen because they enable the results to differentiate between how much the banks value the SDGs compared to how much they have chosen to respect this value by incorporating the SDGs to their credit rating process. All answers will be anonymous, and no names, banks or titles will be recorded. Later, the protocol from each bank will be compared to the other banks, which will be used as a part of this thesis’ result and conclusion.
2.5 Validity and Reliability
The interviews will be conducted with consideration to internal validity, external validity, construct validity and reliability in order to achieve a high trustworthiness (Gibbert, Ruigrok & Wicki, 2008).
The different forms of validity and reliability and their definition are presented in Table 1.
Table 1. Forms of Validity & Reliability taken into consideration when conducting this study, referred by Gibbert, Ruigrok & Wicki (2008).
Validity Form Definition
Internal validity Research logic and conclusion based on the theoretical framework.
External validity Proof that a theory will work in reality.
Construct validity Quality of the data collection.
Reliability How reasonable the analysis of collected data and subsequent results are.
The internal validity of this thesis is connected to the literature review and following understanding of sustainable development and credit management. The association therebetween will generate a consistent sequence of knowledge throughout the thesis. The empirical data from the interviews will then make out the construct validity. On the contrary, the empirical interviews will determine the external validity of the gathered data. The thesis will determine to what extent banks utilize sustainable development and the SDGs to their credit management process, and thus either prove or refute the theory. All three forms of validity will then matter in determining the reliability of the thesis. The reliability will be further discussed both in the following method sections, where the consideration prior to the interviews are debated, and more extensively later on in the general discussion of the thesis.
2.5.1 Process
Interviewees will be informed about the confidentiality before the interviews begin to ensure reliability of the study (Shah & Corley, 2006). As mentioned, no names or titles will be mentioned during or after the interviews in the transcription. At the beginning of an interview, a short introduction to the subject will be presented while also explaining the purpose of this thesis and qualitative research which is the only scope for the interview (Blomkvist & Hallin, 2015). Also, all interviewees must agree on the terms and that recording of audio may be used. Otherwise, the interview cannot be conducted due to confidentiality and privacy and will be of no use for this study (Vetenskapsrådet, 2019). Later, adapted questions regarding their position will continue the interview with in-depth and open-ended questions.
Throughout all interviews, which have the same structure and process, all interviewees are encouraged to answer with their own words and should not be affected in any way. This is so the answers later can be analysed and compared to each other in order to raise the credibility of the study. The purpose is to notice if there is any differentiation or similarities between the interviewees (Urban, 2019).
Autonomy and privacy will be respected and considered with all participants. Ethical aspects according to the Swedish Research Council (Vetenskapsrådet, 2019), will be a part of the technique when interviewing. Swedish Research Council (2019) refers to the ethical consideration as “the consent requirement, information requirement, confidentiality requirements and the good use requirement”. By doing this, it minimizes the risk of creating any type of conflict while simultaneously maximizing the contribution to this thesis.
For every interview, follow up questions are designed whenever it is suitable in order to ensure to maximize the use of knowledge from the interviewee. All interviews are conducted through video or phone calls.
When all interviews are done, transcription will be made thoroughly according to “The SAGE Handbook of Qualitative Data Analysis” by Flick (2013). The instructions from the book explain that the transcription does not have to be precise and detailed, but all of importance to the study should be well-transcribed. Moreover, inaudible sounds such as mumbles or small pauses do not have to be included, only adherable content that is relevant (Flick, 2013). Finally, to maintain anonymity during the transcription process, aliases will be used which can be relatable to their profession (Urban, 2019).
2.5.1.1 Risks
Although the interviews follow all requirements for reliability, credibility and validity, as well as informing the participant of their anonymity, they might not be completely honest in the interview or the following protocol. The questions for the interviews are conducted in a way that they need to be self-critical to some extent, while the interviewers might directly ask supplementary questions to encourage critical thinking.
For the protocol however, the participants from the banks are sitting by themselves and can easily round up results when the opportunity comes up. For example, if they actually are somewhere between 5 and 7 on the scale (where 7 is best), they would naturally put in a 6. Moreover, they might round up that number in order to appear better in relation to themselves and their competitors.
This is because of the human factor of the desire to always be better and might not always be fair with your own abilities (Chandler & Paolacci, 2017). This might affect the trustworthiness of collected data. Therefore, it will be compared and cross-analysed with the interviews and discussed at the end of this thesis in order to maintain credibility and accuracy of the results (Chandler &
Paolacci, 2017).
2.5.2 Coding
In order to categorize and analyse the transcribed interviews as efficiently as possible, a method of coding will be performed to identify and extract the most relevant data for this thesis (Flick, 2013).
The coding process will be based on Creswell’s (2009) six steps of coding to achieve high validity of finding.
The first step will be to organize and prepare all the data, in this case the transcribed interviews, in order and make it easy to follow. Step two, is to simply read through all interviews in order to get a brief overview of what has been said generally. Then, the third step is to actually start to code the interviews by searching for common subjects. When this has been done, the fourth step is to identify important information that is highlighted as either similar themes for similar subjects.
Those themes also get a small description of short keywords in order to identify what information is stored within the theme. When coding the interviews, each keyword and themes that are identified, will be marked accordingly in the margin beside the transcribed interviews respectively.
The fifth step is to gather all the themes and keywords to match it with this thesis in order to make it relevant. “Manufacturing” is for example a great theme that is being used throughout the thesis and is relevant in many perspectives. The themes and corresponding keywords are presented in Table 2, where the methodology is followed and instructed by Creswell (2009). The last sixth step, is describing the meaning themes, which in this case is very straight forward. In other words, the themes presented in Table 2 do more or less describe what they mean and stand for in this study.
This whole six-step process is shown in Figure 4.
Figure 4. The six-step process for coding the interviews, by Creswell (2009).
Thereafter, an iterative process will follow where the keywords and themes will be thoroughly controlled and analysed. Finally, all interviews will be read through one last time to ensure that all relevant information has been included in the coding process (Creswell, 2009). Nonetheless, Creswell’s six steps of coding could still omit relevant information due to human error during the coding process. In 1990, Tesch presented an eight-step process of coding whereas Creswell got his ideas and made his own, but simplified, six step process (Creswell, 2009).
Table 2. The 31 different keywords & 4 different themes were used when coding the interviews, instructed by Creswell (2009).
Keyword Theme
Sustainability SDG
ESG
Environmental Governance Social Ethical
Responsibility
Sustainability & SDG
Branch Sector Industry Manufacturing Small companies Large companies Size
Region
Manufacturing
Background Region
Credit Process Decision
Process Development Credit Consequences Efficiency
General Credit Management Process
Credit Rating Agencies Analysis
Risk Credit Risk Models Rating
Measurements Know your customer
Credit Rating
3 Theory and Literature Review
The following section will provide the reader a further description of the identified problem by presenting the available literature. First, a general view of sustainability is presented in regard to the SDGs and an ESG perspective, followed by the description of sustainability in manufacturing industries through the three perspectives raw material, production and final product. Second, the financial industry’s contribution to sustainable development is reviewed, where the indirect contribution of credit and capital management is in focus. Lastly, the financial industry’s connection to sustainability rating agencies and credit rating agencies are further discussed.
Theories from previous research are analysed and presented with the purpose to gain more knowledge about the field.
3.1 Sustainability
Sustainability has existed for generations but has today a different meaning and significance than it once had. A prime example of historical social responsibility is the 18th century majority ending of slave trade (Hale, 2016). Today, social sustainability is primarily based on ethics (Hale, 2016).
Economic sustainability is correlated with the history of financial profitability. Environmental responsibility has technically been relevant throughout all of history but has come to a critical point for the last century. In turn, this can be seen and reflected from the requirement of new sustainable solutions (Poveda & Lipsett, 2011). A global common goal is to have reached a way of life which would imply that the Brundtland definition of sustainability is followed. The point is to find a strategy that gives you eternal economic growth without affecting the environment or the social impact (KTH, 2018).
In general, the importance of sustainability has increased drastically over the last decade, with media and society that has been increasingly more involved. For example, the major media dominant “The Guardian” state that they no longer support ads for companies that produce oil and gas (Waterson, 2020). Moreover, because the cost of not investing in environmentally sustainable solutions eventually will exceed the cost of investing in replacing fossil fuel there is an increased incentive to invest in renewable energy today (Glanemann, Willner & Levermann, 2020).
Hasan, et al., (2018) states that there exists an increased demand to hold companies accountable for social and environmental issues. One common way to do this is to measure how sustainable an entity is. Models, approaches, and appraisals for measuring sustainability has increased and is expected to increase as the interest of assessing technology increases (EU High-Level Expert Group on Sustainable Finance, 2018; Poveda & Lipsett, 2011). Consequently, by evaluating and examining an activity, it will become the centre of attention for development. That is, evaluation generates a deeper understanding of the activity as well as an opportunity to improve it. Again, this report will focus on sustainability development of the manufacturing industry. The following chapter will present the connection according to their ESG classification.
3.1.1 Environmental Sustainability
The Global Carbon Budget 2019 states that CO2 emissions related to fossil fuel usage grew by 2.1
% during 2018, and thereby hit a new all-time high (Friedlingstein, et al., 2019). The consequences of CO2 emissions and the following climate change are many, from marine heatwaves (Oliver, et al., 2018) to land change (Song, et al., 2018), glacier mass loss (Huss & Hock, 2018), precipitation volatility (Swain, et al., 2018) and a declining forest resilience towards wildfires (Stevens-Rumann, et al., 2018) to name a few. 97 %of published scientists within relevant fields claim that human beings are the reason behind climate change (Cook, et al., 2016). A conversion towards sustainable development is necessary to halt, stop and reverse climate change (Palmer, 2014).
Additional data suggest that as of February 2020, the CO2 levels in the atmosphere were 413 parts per million, the highest level in 650 thousand years (NASA, 2020). The consequence of such high CO2 levels is evident through the increased global temperature. Nineteen of the last 20 years have been recorded as the warmest 20 years available on record (NASA, 2020). As a result, earth's ice sheets are losing 428 gigatons of mass each year, leading to an increase of the sea level with 3.3 millimetres annually (NASA, 2020).
CO2 is one of the biggest factors affecting the environment and climate change today. New solutions and innovations from manufacturers need to be prioritized in order to create an environmentally sustainable future for us and coming generations. CO2 emission does not only contribute to climate change and global warming, but other factors such as air pollution and the surrounding ecosystem. Emissions are basically the amount of gases or particles that are being emitted by the source, while pollution is the effects that come from emissions. Moreover, CO2 emissions have a direct impact on the economy and market (Pinto & Oliver-Hoyo, 2008).
High CO2 levels cause air pollution which affects both the environment and human quality of life.
The CO2 displaces atmospheric oxygen causing breathing problems and even headaches (National Heart, Lung, and Blood Institute, 2019). Moreover, CO2 has been derived as a contributing cause of acid rain from fossil fuel-based power plants (Environmental Protection Agency, 2019). Not to mention, emissions as a result of exhausts from final products of the manufacturing industry include multiple dangerous particles in addition to CO2 that are bad for the environment, such as hydrocarbons, carbon monoxide and nitrogen oxides (Todts, 2018).
All of the above-mentioned changes are leading to a changing ecosystem. Distorted nature rhythms are overwhelming the ecosystem and its ability to counteract devastative fires, floods and storms (Staudinger, et al., 2012). The following disruptions are visible through e.g. reduced water supply as well as the quality and endangerment of habitat loss of species and landscape (Carter, et al., 2014; Spooner, et al., 2011).
Because of increased regulatory and consumer pressure during the last decade, environmental
3.1.2 Social Sustainability
The European Factory of the Future Research Association indicates that sustainable development within the manufacturing industry is one of the main future challenges and opportunities (EFFRA, 2013). Further, EFFRA (2013) claims that the overall goal connected to the future challenges and opportunities is to achieve sustainable care and responsibility for the industry’s employees.
Fantini, et al., (2014) list some of the most common practises for social sustainability within the manufacturing business as divided from two categories: labour practices and stakeholder and community practices. The labour practices include human capital development, work-life balance, learning, talent management, employees’ turnover and satisfaction management, and temporary work. While the stakeholder and community practices include supply chain, code of conduct, customer relationship management and risk and crises management. Consequently, many methods of measuring social sustainability are complex and hard to observe due to lack of knowledge and understanding (Buchert, Pförtner & Stark, 2017). Several methods regarding social aspects have only scratched the surface, while it can be hard to meet all social requirements that are desired (Buchert, Pförtner & Stark, 2017). For example, to improve social sustainability, the entire supply chain network needs to be protected by labour rights, safety, and health. Many organizations do not have the resources or the economy to provide such preventions (Nambiar, 2010).
3.1.3 Governance Sustainability
Corporate governance is a prerequisite for each and every company, as a governing body is crucial to keep the company afloat, and in a positive developing direction. Corporate governance practices became increasingly important after huge devaluation of companies due to fraud, managerial misconduct and negligence at the beginning of the twenty-first century (Baker & Andersson, 2010).
Corporate Governance Sustainability, from here on called Governance Sustainability, is the ability of companies to influence sustainable development through the company governance practices (Krechovská & Procházková, 2014). This could entail everything from improving natural resources and reducing pollution levels to paying fair salaries and respecting obligations to pay the company’s suppliers (Krechovská & Procházková, 2014). Moreover, Santos, Barbosa & Gai (2010) suggest that companies should align their long-term profitability goals with corporate governance sustainability activities, thereby also gaining efficient use of the company's resources.
Krechovská & Procházková (2014) write that manufacturing companies are aware of both the concept of governance sustainability and its importance. Nonetheless, they further suggest that it seems as companies omit corporate sustainability from their business processes as they feel they have to focus on short-term financial results. However, there are some challenges in regard to how to meet all above mentioned sustainability perspectives. The general focus in the manufacturing industry has so far been environmental, due to the critical state of the environment (Nambiar, 2010).
Regulations and international standards make it difficult to govern an organization to meet all requirements (Nambiar, 2010).
3.1.4 The United Nations 17 Sustainable Development Goals
In 2015, the United Nations decided to implement 17 Sustainable Development Goals (SDGs) for peace and well-being for both the people and our planet, now and in the future (UNDPI, 2020).
The 17 SDGs are all a part of the ESG perspectives. While aiming to end poverty, climate change and similar issues, improvement on health, education, reduce inequality and ensure economic growth are also required. Many of the SDGs are a mix of all three ESG perspectives (Chakravarty, 2019). Each SDG is identified and explained in Table 3. Depending on the company and industry, many manufacturers include some or all the SDGs into their strategies and processes. It is required to work with all SDGs at this point, but the goal is to implement an action plan for all SDGs that are of critical importance (UNDPI, 2020). An example of how large manufacturing companies work with their SDGs is presented in Section 3.2.1.
3.1.5 United Nations SDG Directive
The European Union set an important decision in the 2014/95 directive which aimed at making information on how companies work on sustainability issues more transparent and comparable (European Parliament Directive 2014/95/EU). To this end, the directive requires large companies to present a specific sustainability report along their annual report. The directive is in addition to an earlier directive in which disclosure requirements regarding non-financial information, such as sustainability, in the company's annual reports were only required to the extent that it was necessary to understand the company’s development, position and results (European Parliament Directive 2014/95/EU).
All European Union member states are obliged to implement European Union directives to their national legislation. For instance, the Swedish Government enforced an amendment to the Annual Accounts Act in 2016 that began to take effect for the calendar year 2017 in a response to the European Union directive (Bolagsverket, 2019; SFS 1995:1554). Large companies who fulfil specific criteria must prepare a sustainability report along with their annual report. Approximately 1600 Swedish companies were affected by this change (PWC, 2016). The sustainability report must include the following four areas: (1) environment, (2) social conditions and employees, (3) respect for human rights and (4) counteracting corruption. Moreover, the sustainability report must further describe the company’s business model, essential risks and how they can be managed, and central performance indicators.
Table 3. All United Nations’ Sustainable Development Goals described and what Environmental, Social & Governance perspective they affect, by the United Nations Department of Public
Information (UNDPI) (2020).
No. Goal ESG Description
1 End Poverty Social End all poverty everywhere and in all forms
2 Zero Hunger Social
End all forms of hunger, develop sustainable agriculture, improved nutrition
3 Good Health & Well Being
Environmental Social
Enable health and well-being for everyone everywhere
4 Quality Education Social Governance
Enable education of quality and learning opportunities for everyone
5 Gender Equality Social
Governance
Ensure equality among gender and promote women
6 Clean Water &
Sanitation
Environmental Social
Give the opportunity for everyone to have clean water and sanitation
7 Affordable & Clean Energy
Environmental Social
Enable access to modern and affordable energy to everyone
8 Decent Work &
Economic Growth
Environmental Social Governance
Promote productive employment with decent work that enables sustainable economic growth
9 Industry, Innovation &
Infrastructure
Environmental Social
Build infrastructure and sustainable industries that enable innovation
10 Reduce Inequalities Social Governance
Reduce inequalities among and around different countries
11 Sustainable Cities &
Communities
Environmental Social
Cities and communities should be safe and inclusive
12
Responsible Consumption &
Production
Environmental Social Governance
Ensure sustainable and responsible
consumption and production processes among industries
13 Climate Action Environmental Governance
Take active action against climate threats and its impact
14 Life Below Water Environmental Retain oceans, seas and marine life for sustainable development
15 Life on Land Environmental Protect and restore ecosystems and animal life while reverse land degradation
16 Peace, Justice &
Strong Institutions
Social Governance
Promote peace and inclusive society while provide justice and effective institutions 17 Partnerships for the
Goals Governance Strengthen the global partnership and means of sustainable implementation
3.2 Manufacturing Industry
Throughout history, Europe has been a pioneer in industrial change and manufacturing industry. If looking only at the process industry for example, which corresponds to approximately 20 % of Europe’s manufacturing industry today, more than 450.000 different enterprises are involved with over 6.8 million employees (Ferrera et al, 2017). This does not only provide people with jobs, it also yields more than 1.600 billion Euro in turnover, which generates a lot for society in form of taxes and opportunities (Ferrera et al, 2017). However, Atz, et al, (2019) argues that even though there has existed accounting for hazardous environments for a long time, the manufacturing industries did not take ESG sustainability perspectives into account until recent years. Today, most manufacturing companies are required to follow, aim for and report on the UN's 17 SDGs (UNDPI, 2020).
Even though the requirements and restrictions are new on how to manage sustainability issues, many multinational corporations already aim to reduce the environmental impact of their products and processes. Manufacturing companies constantly try to develop new products and solutions in an already competitive market. New sustainable factors could potentially attract new stakeholders and users, but they also come with a greater risk due to their nature of unexplored territory (Wendt, 2015). As any other industry, the manufacturing industry has the requirement to gain financial profit or else investors will be absent (Wendt, 2015).
The manufacturing industry is under pressure, with a lot of addressed environmental issues.
Discussions in large manufacturing companies have been brought up regarding how much responsibility of sustainable impacts the manufacturing industry should have (LKAB, 2019).
Today, society relies on the continued operation of manufacturing companies which makes the relationship between the society and manufacturers fragile and unforgiving. An illustrative instance of societal denial and wilful ignorance was disclosed with the ‘dieselgate-scandal’ which began with a notice of a violation of the Clean Air Act to German automaker Volkswagen Group (Topham, et al., 2015), and thereafter subsequently disclosed to a number of multinational corporations. Ironically, Volkswagen announced their Sustainability Report in 2007 with the statement that they are “moving into the future responsibly” (Nunes & Bennett, 2010), and was regarded as a leading sustainable company prior to the scandal (ElAlfy & Weber, 2019).
On balance, the manufacturing sector is a complex and advanced industry. It requires much energy and material to constantly create better and more efficient products. Improved resource and waste management is gradually moving the manufacturing industry forward to a more environmentally sustainable future (Giampieri et al, 2020). In general, Joung et al (2012) summarize the Manufacturing industry by three pillars; Raw Material, Production and End Product, visualized in Figure 5. Further, this is applicable on most manufacturing industries such as steel and vehicle manufacturers.
Figure 5. Raw Material, Production & End Product form the three pillars of the Manufacturing Industry, illustrated by Joung et al (2012).
3.2.1 Swedish Steel Manufacturers
A large part, 11.4 %, of Europe's manufacturing industry is represented by the automotive industry (ACEA, 2018). Further, the automotive industry uses steel as the main resource when producing and manufacturing vehicles (Broek & Hickey, 2019). This means that steel production plays a big role in how a vehicle is manufactured. Therefore, the automotive industry needs manufactured steel that is sustainably produced. Sweden is a large steel exporter to over 140 different countries all around the world. A large portion of the exported steel is used in automotive manufacturing (Wilhelmson, 2017).
The automotive industry relies on steel production, where Sweden is a large contributor. However, even though Swedish steel companies are considered world-leading in sustainability, Sweden’s steel production has a history of not being sustainable, mostly due to old and inefficient technology and processes (Wilhelmson, 2017). In fact, 10 % of Sweden’s CO2 emissions comes from the steel industry (Wilhelmson, 2017). While CO2 emissions directly related to the vehicle’s exhausts are constantly decreasing, the production of the vehicle itself becomes more important in order to reduce its overall environmental footprint (Wilhelmson, 2017).
SSAB, LKAB and Swedish Vattenfall (energy provider) all have major roles in Sweden's steel production. All of them are part of the HYBRIT project, where the goal is to decrease the CO2 emissions of the steel industry to zero by introducing hydrogen instead of coal in production. The rest-product would be water instead of CO2 (Wilhelmson, 2017). Long-term, this would decrease CO2 emissions in the production of the vehicles, and of the manufacturing industry.
As mentioned earlier, large companies have the obligation to present in their annual report how they work with sustainability and sustainable development. This also applies to steel manufacturing companies such as SSAB and LKAB. SSAB, for example, is focusing on seven of the 17 SDGs;
Gender Equality, Affordable and Clean Energy, Industry, Innovation and Infrastructure, Responsible Consumption and Production, Climate Action, Peace, Justice and Strong Institutions, and Partnerships for the Goals (SSAB, 2020). Because of SSAB’s role as a steel manufacturer,
