By Sofia Santos
According to the Report produced by the Commission on the Measurement of Economic Performance and Social Progress, chaired by Joseph Stiglitz, it is acknowledged that “…GDP is an inadequate metric to gauge well-being over time particularly in its economic, environmental, and social dimensions, some aspects of which are often referred to as sustainability.” Since Ethical Finance, in the shape of ethical banks or responsible investments, clearly state their lending policy which is related with their mission, which in turn is associated with a set of values that go beyond shareholder maximisation profit, then one can see the ethical finance sector as a tool to promote the new well being defined above. In fact, ethical bank’s values are instead associated with the maximisation of society well being, since economic, social, environmental and cultural aspects are all taken into consideration in a transparent way. Therefore, this article argues that the main role of ethical finance in the 21st century is to be able to promote and improve local well being by providing finance to local entrepreneurs that are able to develop businesses with positive environmental and social impact.
Well Being in the 21st Century
The well being of nations has been associated with the wealth that a country is able to create. This wealth has been associated with “money, riches and world possessions”1, which has been translated into Gross Domestic Product (GDP) and Gross National Product (GNP). Nevertheless, it is becoming increasingly accepted today that GDP is not able to provide the real information about the genuine well being of populations. In fact in 1968 R.F. Kennedy, in his speech at Kansas University, already states such limitations, by arguing that GNP “…measures everything in short, except that which makes life worthwhile”, and that it does not include “…the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials”. Some economists might consider such sentences as romantic or utopic, and more appropriate to philosophical debates than to economic models and public policies developments. But finally it is possible to state that, 50 years after that speech, there is a growing number of economist and politicians that recognise the need “…to expand the concept of wealth to include human wealth, social wealth and natural or environmental wealth”.2
The recognition that economic models, economical and financial policies need to incorporate other factors than just stocks of capital and labour, is now recognised by the United Nations, European Commission and by some prominent names such as Joseph Stiglitz (winner of the 2001 Nobel economics prize), Amartya Sen (winner of the 1998 Nobel Prize for work on developing countries) and Jean-Paul Fitoussi (Professor of Economics at the Institut d’Etudes Politiques de Paris).
In 2009, the United Nations published a report entitled “A Global Green New Deal”, which argues for the need to “promote the use of international statistical standards, the System of Environmental Economic Accounting (SEEA) to measure systematically the contribution of the environment to economic growth, including green jobs and the impact of the economy on the environment”.3 The main message of this document is that economic recovery, from the 2008 financial crises, could be done by focusing public and private investment in environmental related businesses, and in order to understand the impact of those measures, indicators would be needed. Also the European Commission has endorsed this movement, recognising that GDP was “…never designed to be comprehensive measures of prosperity and well being. We need adequate indicators to address global challenges of the 21st century such as climate change, poverty, resource depletion, health and quality of life.” 4 As such, the European Commission published in 2009 a roadmap to improve economic indicators towards a future GDP that is able to incorporate the environmental and social aspects of progress.
This trend was also endorsed by Nicolas Sarkozy in 2008 as President of France, where he challenged and commissioned Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi to analyse new ways of measuring social progress, in an attempt to include happiness and well being in the measurements of economic progress. This work originated a report, known as the Report produced by the Commission on the Measurement of Economic Performance and Social Progress (CMEPSP), published in September 2009, which recommended a shift from the emphasis from gross domestic product, which measures economic production, to well being and sustainability.
In fact, this Report acknowledges that “…GDP is an inadequate metric to gauge well being over time particularly in its economic, environmental, and social dimensions, some aspects of which are often referred to as sustainability.” 5 It also recognises that well being is also related with non-economic aspects of life, including people’s desires, feelings and the natural environment around them. It goes further by stating that such well being can only be sustained over time if we are able to pass on to future generations stocks of natural, physical, human and social capital.
Finally, this report was able to bring to light the work done by the economist Herman Daly, who since the seventies has written many books and articles about the limitations of GDP, having developed, with other authors, the Index of Sustainable Welfare (ISEW) for the United States in the late 1980s. According to Daly, “Between 1950 and 1970 the GNP and the ISEW rose together. From the early 1970s the ISEW remained flat…, while GNP continued to rise…”.6 These results allowed him to conclude that economic welfare in America had stabilised after the 1970s despite the fact that GDP continued to increase.
It seems that there is a growing consensus at an institutional and intellectual level, about the fact that the current measure of wealth does not provide the genuine measure of well being. It is now clear that in the 21st century the well being of the citizens is also related with environmental issues, social aspects and ethical behaviour. The financial crises already taught us that monetary and financial wealth can be more subjective than the real wealth coming from good environmental conditions, social cohesion and good ethical behaviour. Therefore, in order to be able to promote such well being, one needs to join real wealth with the financial and monetary wealth, as already argued by Mark Alenski. This linkage between money and well being of the 21st century has not yet being publicly discussed. In fact, the report commissioned by Nicolas Sarkozy published during the urge of the financial crisis, could have also raised some issues about how such sustainable well being could be promoted in societies. In concrete, this report could have addressed the question about how the finance system could catalyse economic activities that make it possible to pass on to future generations stocks of natural, physical, human and social capital. I argue that Ethical Finance could be seen as an instrument that could be used locally to induce new types of businesses. This Ethical Finance sector would invest in companies and entrepreneurs, who are able to create economic activities with economic, social and environmental positive impact. By doing this locally, one would be developing small banks, with stronger knowledge about their clients, and focus on the real economy.
Ethical Finance
The idea that the financial system has some kind of public impact, and as such it needs to have some other purpose than just the maximisation of short-term returns, this is still not being widely discussed. But it should!
In 1991, Sarokin and Schulkin7 stated that “The business of moving money is inextricably linked to the movements of raw materials, finished goods, labour, and ultimately, to the quality of our environment… If we are to achieve sustainable development, we must be prepared to finance it”. This sentence is able to capture the situation in which we are now, in the beginning of the 21st century: finally mainstream economists agree with the idea that we need a sustainable economy that is able to pass to the future generation the financial, natural, physical, human and social capital; but we now need to speak with the bankers and investors in general, and convince them to create financial mechanisms to allow this type of economy to flourish. The 2008 financial crises brought us one positive aspect and one negative on this regard: a) In one hand, the financial system had never been so challenged about its role in society and its purpose as a business; b) On the other, there was an increase in regulation and in capital requirements, which has lead to higher cost in all types of banks, including the existing ethical banks.
It was after 2008 that the Ethical Bank trend became more known. An Ethical bank can be defined as a bank with a mission to promote a certain type of well being that is associated with a set of moral or ideological values. Usually they have their lending policy widely displayed in the Internet being very clear about which sectors they invest in and those they do not. For these banks it is important to obtain economic and social profitability, which is being much more transparent than mainstream banks about where they invest the depositor’s money. According to the Global Alliance for Banking on Values, there are 25 ethical banks around the globe. The latest report commissioned by this organisation in 2013 compares the financial performance of the largest banks in the world with the ethical ones, and concludes that in general, ethical banks, present better financial data than the largest banks. Nevertheless, the increase in regulation and compliance work, together with the need to increase capital requirements in a context of increasing bad debt, has, conveniently, pushed the topic of ethical finance and banks to a niche segment. But this could be positive!
According to Boatright, 20028, ethical banking could be used as an instrument or mechanism that the Public Authorities could use to mitigate the disruptions of the banking system. This means that, if governments recognise the need to finance a sustainable economy and the existing banks do not address it, then governments could use this approach to catalyse the creation of businesses that are able to provide us with the well being levels of the 21st century. In fact, since “banks have a structural power over clients, being able to induce them to develop specific projects since business actors depend on their financial support”9 then Governments could either promote the creation of small ethical banks, or could induce the development of financial instruments, in the existing banks. These instruments would promote investments in companies that are able to contribute towards the appropriate levels of stocks of natural, physical, human and social capital that are needed for the future generation.
Since at the beginning, sustainable businesses might lead to lower economical returns than if we invested in “business as usual” activities, yet fiscal measures can be used to decrease this disadvantage. In 1995, the Netherlands created the Dutch Green Fund Scheme, which was able to develop: a) Fiscal incentives for those consumers willing to invest in environmentally friendly projects; b) A set of criteria that entrepreneurs should comply with in order to have their project included in the national fund; c) A set of environmental and social investment criteria that banks and fund managers would need to have in order to be able to sell in their premises the Dutch Green Fund. Some studies have been done in order to analyse the impact of this policy and all concluded that the positive social and environmental impacts were greater than the costs, and therefore such measures should be further developed.
According to a report published in 2011 by CRBM10, ethical banking represents less than 1% of the traditional financial industry, albeit growing rapidly. If one takes into account that the financial sector is the largest sector in the world, then 1% is quite relevant.
Given the lessons learned from the 2008 crisis, I argue that small ethical local finance, via ethical banks or ethical funds, could be a good mechanism to regain the trust from society on the financial system, and mainly to promote sustainable entrepreneurship amongst local entrepreneurs, inducing the development businesses that have positive economic, environmental and social impact. By doing so, ethical finance can promote the well being of the 21st century.
About the Author
Sofia Santos acts as a consultant of a boutique consultancy, SystemicSphere, based in Portugal, and as a President of a Non Governmental Organization called K-Evolution. She is an expert on sustainable and ethical finance, and also on Green Economy. She has a PhD from Middlesex University, London, where she studied how banks could promote sustainable development and green economy. She has published two books about the role of banks in promoting green economy and well being, and she is finalising her third book about “Green Economy”. More about the author: http://sofiasantos2050.wix.com/foresight.
References
1. Anielski, M. (2009). The Economics of Happpiness, pp. 16
2. Anielski, M. (2009). The Economics of Happpiness, pp. 16
3. United Nations Environment Programme (2009). Global Green New Deal, Policy Brief, pp. 12
4. http://ec.europa.eu/environment/beyond_gdp/background_en.html
5. Report by the Commission on the Measurement of Economic Performance and Social Progress, pp. 8
6. Daly, H. (1996). “Beyond Growth: The Economics of Sustainable Development”, pp. 97
7. Sarokin, D., and Schulkin, J., (1991). Environmental concerns and the business of banking. The journal of commercial bank lending, February 1991, pp.7
8. Boatright, J. R. (2002). Contractors as stakeholders: Reconciling Stakeholders Theory with the Nexus-of Contracts Firm”, Journal of Banking and Finance, 26 (9), 1837-1852.
9. Schaper, M., 2007. Leveraging Green Power: Environmental rules for project finance. Berkeley Electronic Press.
10. CRBM – Campagna per la Riforma dela Banca Mundiale, Valeruo Carboni, 2011.
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