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«Global TrusT and EThics in FinancE Innovative Ideas from the Robin Cosgrove Prize Carol Cosgrove-Sacks / Paul H. Dembinski Editors Trust and Ethics in ...»

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It is not necessarily wrong for the poor to borrow to meet basic food needs. However savings rather than microfinance would offer a better alternative. This is because it is unsustainable to depend on excess debt for consumption purposes. This calls for innovative yet cheaper technologies to meet the very basic needs of food, health and education. All this should be neatly wrapped together with responsible governance, in 340 Trust and Ethics in Finance terms of resource mobilisation and reallocation. This should be developed to ensure that households would need credit for reasons other than for meeting basic consumption needs, but rather to use for incomegenerating activities that bring about real increases in income. This would provide an efficient way of lending money to the poor, since only those who can make best use of it in terms of entrepreneurship will require access to credit.

Finally there is currently a receptive attitude within the national and international community to microfinance instruments and, by and large the microfinance institutions still have a respectable image among many donors and governments. It is also true that there is no major apparent crisis or emergency in the microfinance institutions. But there are signs of cracks in the overall impact that microfinance has had among poor borrowers. These borrowers continue to operate under such tight debt schedules that it is a real struggle for them to build business volume and therefore growth for the enterprises, let alone escape poverty. This calls for regulatory policy, and it is important to note that policies implemented in tranquil times can help prevent major problems in the future.

References Christen, R.P., 1997. Banking services for the poor: Managing for financial success, Washington, DC: ACCION International.

Diagne, A., 2000. Design and Sustainability Issues of Rural Credit and Savings Programmes: Findings from Malawi, Washington, DC, IFRI Policy Brief No. 12.

Kiiru, J./ Mburu, J., 2007. “User Costs of Joint Liability Borrowing and their Effect on Livelihood Assets for Rural Poor Households”, in: International Journal for Gender Women and Social Justice, July-December.

Roodman, D. and Qureshi, U., 2006. Microfinance as Business, Working paper No. 101, Washington DC, Centre for Global Development.

Schreiner, M., 2003. “A Cost-Effectiveness Analysis of the Grameen Bank of Bangladesh”, in: Development Policy Review, Vol.21, No3.



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Money makes the world go round. The growth of the now 370 trillion dollar derivatives market, according to a Bank of International Settlements estimate for the first half of 2006, serves to remind us that the financial sector is the compass from which both companies and countries take their direction. Yet as news about climate chaos, persistent poverty and intensifying inequality continues to percolate our pleasant lives in the West, we have to ask whether money is now causing the downfall of the world. In recent years more people have been choosing to engage in global finance to solve problems of the environment and international development. Their efforts herald a new paradigm for ethical finance, which no longer focuses on personal ethical dilemmas within existing professional frameworks but on how to use opportunities as a financial services professional to transform those frameworks so the world’s most powerful motor – money – makes the world work around barriers to a more sustainable, just and healthy future.

Our paper outlines how this is happening both in professions and in academia. It identifies urgent interconnected challenges of climate change, unemployment, local enterprise and poverty reduction, and sugTrust and Ethics in Finance gests that a new approach to socially responsible investing is required to create new frameworks for the innovative financing of sustainable enterprise in the global South. Investors can make money while contributing to low-carbon high-employment societies, if they help support the development of appropriate risk adjusting mechanisms. This focus on creating new financial frameworks is one of the highest embodiments of a commitment to our common humanity and ecology, which is the ground of all subsequent ethical discourse and philosophy.

Emerging trends in business ethics

To a large extent the question and practice of ethics in finance is influenced by the broader category of ethics in business. Both because financial firms are companies and because questions of ethics cut across various types of business, and also as business ethics is an established discipline within management schools around the world. Therefore reflecting on the situation in business ethics academe can help us to see emerging trends of interest, hence what the future of ethics in finance might entail, both practically and intellectually.

The traditional academic approach to business ethics has been largely focused on esteemed philosophers, such as Aristotle, Kant, and Mill, and typically engages in an unending debate about whether certain business practices are either right or wrong. However, since 2003 there has been evidence of a changing paradigm. That year saw the main association for business ethics scholars in Europe, the European Business Ethics Network (EBEN), hold its conference titled “Building Ethical Institutions for Business” and allowed “the participants to reflect and debate on the role of institutions in the transformation of business toward a more human and ethical form”. This was not the focus on the individual manager’s ethical dilemmas and problems that has characterised much business ethics work in the past, but rather a discussion of “stakeholder activism, global governance structures, corporate social responsibility, The South and Carbon Dioxide 343 corporate governance, corporate citizenship, ethical investment, stakeholder society, Internet-enabled corporations, environmental regimes, human rights, future generations, and ethical institutions for corporate accountability”.

Another illustration of this trend is the best-selling textbook, Business Ethics: A European Perspective (Crane and Matten, 2003). The subtitle “Managing Corporate Citizenship and Sustainability in the Age of Globalisation” indicates that this is not a traditional business ethics tome. The book still discusses ethical theories and ethical dilemmas, but it frames these within the broader debates conjured up by the subtitle.

The problem with business ethics has been that ethics is a postbusiness creation, both literally and conceptually. The context was nearly always assumed and managers asked to respond to a consequent dilemma. Today many managers and students of business are asking for something different – for ethics to be the starting point for their work.

This is partially due to a growing awareness of the power of business and finance, and the responsibility this brings. Of the world’s 100 largest economic entities, according to an Institute for Policy Studies report, 51 are now corporations and 49 are countries. With daily stories of private equity and hedge funds demanding dramatic changes in corporate structure, and ratings agencies able to influence the value of a national currency with their assessments of credit risk, no one can ignore the financial sector’s cumulative effect as a compass steering both companies and countries.

The pressure of civil society Consequently, people who are concerned about social and environmental issues have been turning to the financial sector. This is highlighted by the growing interest and activity of non-governmental organisations (NGOs). In the UK a variety of campaigning organisations including Amnesty International, Greenpeace, People & Planet, and WWF joined together to launch FairPensions, a campaign to mobilise UK penTrust and Ethics in Finance sion fund owners to put pressure on their trustees, fund managers and ultimately the companies they invest in, to behave in a responsible and sustainable manner. An international coalition of NGOs also formed Banktrack, and agreed a common declaration of what they want to see from responsible banks. Many people with an NGO background have gone into the City, in order to effect change from there, including people like Rob Lake (formerly at Traidcraft now Head of Governance at Hendersons Global Investors), Nick Robins (formerly of International Institute for Environment and Development now Head of SRI at Hendersons) and Steve Waygood (formerly of WWF-UK now Chair of UK Social Investment Forum).

This indicates an approach to finance whereby a person’s ethical interests are the starting point for engaging in a career in finance. Consequently ethical issues are not seen so much as questions of how one should behave within a given office context, but rather how one wishes to contribute to the wider world by choosing a career within the financial sector. The new trend in the business ethics academe reflects this, no longer just treating managers as victims of circumstance but helping them become masters of destiny, to change the circumstances for the better. If this is our starting point and if we consider finance to be, collectively, the most powerful driving force in the world, then we must be clear about the greatest challenges of our time, and the areas where finance could do a lot more to help.

Key challenges of our time

With global consumption levels five times what they were just 50 years ago, the natural world is buckling under the weight of demand.

The impact tolls of all this are clear: climate instability, ecosystem pressures (already leading to complete collapse in some instances), soil loss and degradation, ground water depletion, loss of productive land, and toxic accumulation are some of the key issues. The global scientific conThe South and Carbon Dioxide 345 sensus on climate change, as exemplified in the 2007 Report of the UN Intergovernmental Panel on Climate Change, proves beyond doubt that there are limits to what our atmosphere can take, and what changes in our atmosphere our nature, agriculture, water supplies and cities can cope with. The UK Stern Review on the Economics of Climate Change 2007 predicts a 20% reduction in Global GDP, which is equivalent to two world wars combined. Already, people are losing their lives and livelihoods due to climate change. The scientific imperative is to control greenhouse gas emissions so that climate change can be kept within two degrees of pre-industrial levels. This implies a global halving of such emissions by 2050 at the very least.

Pollution and inefficient consumption is everyone’s problem and responsibility. The over half a billion middle-class Asians are consuming significant and growing amounts of resources with negative impacts on their own rural and urban environments as well as abroad. For example, the Indian middle class have higher carbon lifestyles than the UK average. We urgently need to focus on how to help the global South to develop, using low-carbon technologies and business activities.

In such countries there are very real concerns about poverty. The current boom in investment, which we discuss below, is mainly focused on large companies and urban centres. Yet the world’s top 200 corporations account for over a quarter of global economic activity, while employing less than 1% of its workforce. There is a need to stimulate small and medium sized enterprises (SMEs) that employ more people. In addition, it is these SMEs that need to be targeted if we are to meet the challenge of climate change. Promoting low-carbon high-employment societies is possible. The European Trade Union Confederation recently concluded that “less dependence on natural resources can be coupled with more intensive use of labour” and predicted that “by 2010, it is estimated that the global market for environmentally friendly products and services will be worth around €700 billion”.

346 Trust and Ethics in Finance Thus we believe that the dual climate-employment challenge, particularly in emerging markets, is crucial, and one with which financial services need to engage. It is essential if we are to promote the sustainable economic development in the global South that can raise people out of poverty without destroying the basis for human life on Earth. Consequently, within a new paradigm of ethical finance, we turn to the question of how to facilitate investments in sustainable SMEs in emerging markets.

Only backing the big guns?

With the liberalisation of financial markets in Asia, Africa, and Latin America, emerging markets have emerged as an important asset class for investors in developed countries. Further, recent macro-economic trends such as strengthened banking sectors, increased use of Generally Accepted Accounting Principles, increased focus on Return on Investment (ROI), and decreasing information inefficiencies have made this asset class an increasingly popular one with the investment community in Europe, North America and Japan. The prevailing argument in the international investment arena suggests that although emerging markets are more volatile than their developed market counterparts, the inclusion of an emerging market asset in a balanced investment portfolio can actually reduce volatility of the entire portfolio, while simultaneously increasing the global return. Needless to say, the fundamental principle of profit maximisation underpins most of the investment activity in relation emerging markets. Profit maximisation, in itself, could be a fair goal to pursue, and it could be said that most investment activity relative to Emerging Markets Enterprises (EMEs) takes place within ethical norms or book-balancing ethics; but given the complexity and interconnected nature of the present-day world, such a judgment would be partial at best.

The South and Carbon Dioxide 347 For a meaningful discussion on the role of ethics within the world of finance and its interaction with the EMEs, it is crucial to look at the broader sociological, economic and cultural contexts within which these new market economies are emerging. It is also important to acknowledge that such economies exist within countries, mostly low to middle income and developing, that are characterised by numerous development challenges including endemic corruption, ineffective public institutions weak regulatory systems, and wide-spread environmental degradation.

Seemingly benign investment decisions that are made in London, New York, and Tokyo with the simple intention of maximising profits could have far-reaching implications on the development of countries with emerging economies. Particularly, when such investing decisions embed a bias towards large firms that are subject to the short-term expectations of the stock markets, they could have serious negative impacts on the development and growth of such economies.

Socially Responsible Investing and emerging markets

Social investors have been using three basic strategies to protect financial returns while pursuing a social agenda. Screening (and divesting) excludes certain securities from investment consideration based on social and/or environmental criteria. For example, many investors screen out arms company investments, or divest when they make a decision no longer to hold such assets. Shareholder activism and engagement involve efforts to positively influence corporate behaviour by initiating conversations with corporate management or submitting and voting proxy resolutions.

Positive investing involves investment in activities and companies believed to have a positive contribution to society. Positive investing activities can target underserved communities, or clean technologies.

Socially Responsible Investing (SRI) is not a new phenomenon.

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