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Ethical finance and corporate social responsibility

Ethical finance and corporate social responsibility. Leonardo Becchetti. www.benecomune.net. FEBEA Assembly June 23, 2011, Costigliola. Ethical economic research increasingly important Personal World Research ranking (May 2011) REPEC. Italy (rank 19 of 2061, top 0.90%)

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Ethical finance and corporate social responsibility

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  1. Ethical finance and corporate social responsibility Leonardo Becchetti www.benecomune.net FEBEA Assembly June 23, 2011, Costigliola

  2. Ethical economic research increasingly importantPersonal World Research ranking (May 2011) REPEC • Italy (rank 19 of 2061, top 0.90%) • European Union (rank 317 of 13928, top 2.16%) • Europe (rank 346 of 15116, top 2.15%) • World (rank 1132 su 28476, top 3.97%) • World downloads ranking (rank 140 on 28476, top 0.88%)

  3. Contents of the presentation • The three(four)-sidedproblem • Causes • Potentialsolutions and the role of ethical finance • Conclusion and policy advicefor “pioneers

  4. The three(four)-sidedproblem • Why ? Beforeglobalisationbalance of powerbetweendomesticcorporations, institutions and tradeunions…. • Afterglobalisationimbalance of powersinceinstitutions and tradeunionsremaindomestic… • ….sociallyresponsibleconsumersaskmultinationalcorporationsto take responsibility

  5. The three-sided problem: causes and potential solutions • -the “bottommillion” - the “skyoverPeking” (environmentalsustainability); - the Easterlinparadox The financialcrisis • Cultural factors: anthropological and corporate reductionism, the “Baumol” crisis of relationalgoods • Solution (cannotbeone-sided): creation of socially and environmentallysustainableeconomicvalue (i.e. Green “new deal”). Goal of “sustainablehappiness”. • The role of ethical banking in the solution

  6. Non s It is not just their problem, it is also our problem . Globalisation increases interdependence and a mass of desperate poor is a threat to wellbeing of uioninised unskilled workers in high income countries

  7. O C Bruno The broken promise and the equity/ efficiency problem from the Edgeworth box The market promotes a welfare improvement for both transactors in the exchange (from C to O) but does not solve the equity problem (C is far from the center and the poorer individual may be forced to a transaction which is against its dignity). The equity problem should be solved by institutions and their policies. However (domestic) policies satisfy the median voter and find it difficult to address problems of poors and of global public goods. Anna

  8. E. op. and growth Endowments:wealth, land, social group, family background,… Process:investment, schooling, market transactions, political process. Limits to equal opportunities: lack of access to education and credit Outcomes:income, consumption, health, environment,… Individual traits and preferences:tastes, talents, efforts,…

  9. Country level results on the determinants of growth • Conditional convergence is confirmed and support interpretation C • Pessimistic (deterministic) perspective: inequalities are inevitably bound to increase; • Optimistic (deterministic) perspective: inequalities are inevitably bound to reduce (catching up); • Halfway path: conditional convergence arises if developing countries catch up in terms of factors of conditional convergence: • Physical capital investment and infrastructure • Human capital investment • Information Technology • Quality of institutions and social capital Temple (1999 JEL), Sala-I-Martin (2002),Aghion and Durlauf (2005)

  10. The three ingredients of the environmental dilemma: population growth, economic growth, change in environmental efficiency of production Environmental efficiency grows by 15 percent but consumption of 45 percent. The net is an increase in oil demand of 20 percent mmascia 18 ottobre 2007

  11. The Easterlin paradoxDecoupling between gdp growth and life satisfaction ? Confirms of the paradox are also reported by Blanchflower and Oswald (2004) for the UK, Frey and Stutzer (2002b) and Veenhoven (1993) for Japan. Becchetti and Rossetti (2008) show that one third of individual-year achievers in Germany is frustrated over the period 1982-2005.

  12. The explanation It does not depend by a nonpositive relationship between income and happiness….

  13. Per capita income is not a good measure of financial wellbeingfirst explanation • In the US rising household debt (De Bonis et al. 2007) and increasing inequality (Wilkinson and Pickett, 2009). In Italy saving rates and wealth to income ratios are higher and debt to income ratio far lower than in the US. Health and education are free and a higher stake of pension rights is not affected by stock market volatility.. • If per capita income in the US has risen significantly in the post world war II period, the per capita flow of money available after paying debt interests, health insurance and education for a large share of the population may have not risen much. • In addition to it higher income inequality may have reduced life satisfaction when comparing material achievements with the average ones of the peers …we looked too much to per capita GDP while disposable income after paying health and education is much more crucial for life satisfaction

  14. Statisticalmyopia: wealth of countriesisnotincome per capita but the stock of net wealth, humanrelationships, social capital, environmentalgoods, ecc.

  15. Life satisfaction Lottery winners Survived victims of tsunami Income the instantaneous relationship is concave….

  16. And also the cross-sectional one….

  17. Rationales for the paradox • Diminishing returns • Relative income, positional competition, “treadmill effects” (Frank, 2005; and Ferrer-i-Carbonell, 2005) • Hedonic adaptation (Clark et al. 2004; Di Tella et al. 2005) • the Baumol’s “relational disease” (crowding out of relational life which strongly contributes to our wellbeing)

  18. The “Baumol” disease of relational goods • The opportunity cost of time invested in human relationship is grown enormously with the increase in labour productivity and in opportunities of non relational leisure • Relational goods require coordinated effort and suffer from coordination failures • Human being ends up in a “low relational good” trap • All indicators of relational goods show their crisis in Western countries…. • ….but relational goods have a strong positive effect on individual’s life satisfaction • Sources: Helliwell and Putnam (2004), Bartolini et al. (2007), Corrado and Aslam (2007), Becchetti et al. (2008), Bruni and Stanca (2008), Meier and Stutzer (2008), Powdathvee (2008)

  19. The“Baumol” disease of relational goods • The opportunity cost of time invested in human relationship is grown enormously with the increase in labour productivity and in opportunities of non relational leisure • Relational goods require coordinated effort and suffer from coordination failures • Human being ends up in a “low relational good” trap • All indicators of relational goods show their crisis in Western countries…. • ….but relational goods have a strong positive effect on individual’s life satisfaction • Sources: Helliwell and Putnam (2004), Bartolini et al. (2007), Corrado and Aslam (2007), Becchetti et al. (2008), Bruni and Stanca (2008), Meier and Stutzer (2008), Powdathvee (2008)

  20. Easterlin and Angelescu’s regression replicated on our sample Happiness & GDP in Developed countries (15 years)

  21. Happiness & Social Capital Developed countries (15 years)

  22. Causes of the financial crisis • Mass consumptionwithincreasingincomeinequalityissustainedwithdebt • Abundance of liquidity at low or negative real interest rates create conditionsforcarrytrade • Overlending (as in the Latinamericandebtcrisis) • From originate toholdto originate todistribute • Conflicts of interest of rating agencies (and the neglectedsignalsfrom social rating agencies and the “nunearlywarning system”) • Regulatorycapture (the Madoff case example)

  23. The cause of reduction of resources from the public sector is not due to government inefficiency…

  24. …la notte dei “debiti viventi”

  25. Causes

  26. The cultural problems of economics • Anthropological reductionism (Sen (1976) homo oeconomicus without sympathy and commitment, (individua substantia rationalis but not persona) • Corporate reductionism (whatever is between profit maximisation and philanthrophy is suspicious) • The Babel’s tower of specialisation and its effect on policy advices • Reductionism in the definition of the goal of economic action (“doped” indicators: per capita income without looking at debt to income and wealth to income ratios)

  27. Justification for reductionism • Edgeworth box of separation between equity and efficiency • Market faillures (negative externalities, insufficient provision of public goods, market power) are tackled by benevolent, efficient and perfectly informed institutions • ..if this is true self interest can be reconciled with social optimum • ..but persistence of poverty, environmental degradation and the happiness paradox confirm that institutions are weak and so far unsuccessful in tackling the problem • Reasons: lack of global governance, median voter, absence of “benevolent planner”, regulatory capture, etc.

  28. Against anthropological reductionism A huge number of lab and natural experiments document that individuals are also driven by reciprocity, inequity aversion, moral committment and social norms - Ultimatum games (Camerer and Thaler 1995), Dictator Games (Andreoni and Miller 2002), Gift Exchange Games (Fehr, Kirchsteiger and Reidl, 1993; Fehr, Kirchler, Weichbold and Gächter 1998), Investment Games (Berg, Dickhaut and McCabe 1995) and Public Good Games (Fischbacher, Gächter and Fehr 2001; Fehr and Gächter 2000). Anthropological reductionism is harmful for economic performance ! Trust game and prisoner’s dilemmas tell that lack of trust leads to coordination failures and to individually and socially suboptimal results.

  29. Anthropological fundations of economics The two different anthrolopolical models: • homo oeconomicus (Von Hajek “the family shame”, Sen “the rational fool”) (myopic) self-interest as the only source of life satisfaction • Revealed model from life satisfaction estimates: life satisfaction arises from quality of relational life (symphaty is as important as self interest) CONSEQUENCES OF THE TWO MODEL The first one erodes social capital and tends to be applied not only to secondary but also to primary relationships. The second creates social capital THE DISMAL OUTLOOK Lab experiments show that the group of individals following more the homo oeconomicus approach (and less the alternative of reciprocity, inequity aversion, etc.) are students of Business schools

  30. Why corporate reductionism can be harmful Why profit maximising banks were more involved in the subprime crisis than cooperative banks? Desperate search for higher profits (credit is a mature market with low returns..) • Efficiency cannot be the top rank value (il tassista e il giapponese) • Maximum profits do not always serve social values. Microfinance is an example of trade-off between profitability and outreach • Most markets are plagued by asymmetric information and products sold are not “experience goods”. In such cases reputation does not work and profit maximisation in in conflict with consumer (and other stakeholders) wellbeing • Rules are not perfect, regulators are not supermen but often “captured” institutions are weak and global governance is weak or missing. Hence individual self interest is not magically transformed into social wellbeing

  31. Corporate reductionism and the financial crisis • Reductionist view: non profit maximising firms cannot survive in the “Darwinian” market competition. • Post-crisis “Copernican” view: the unique goal of profit maximisation in complex organisations with informational asymmetries create the premises for short term opportunistic behaviour of their members which endanger their survival.

  32. Solutions

  33. Solutions • Re-orientation of economic system toward the creation of socially (relationalfriendly) and environmentallyresponsibleeconomicvalue (fromexploitation of naturalresourcesto the increase of the productivity of “natural capital”) • Bottom-upaction of SR consumption and saving • Fair trade, ethical finance, CSR

  34. The role of socially responsible consumption and savings • Creation of economic value with values (intangibles) • A vote which is more powerful than political vote (bipartizan systems look at median voters…) • A matter of longsighted self interest in both the environmental and social dimension (wellbeing of low skilled in the West will keep on being in danger unless the world poverty gap is bridged) • An increase in participation and democracy • A support to competitiveness of SR corporations • The best way to tackle the two poverties: material poverty of beneficiaries and poverty of sense of life and life satisfaction of corporate workers

  35. Sales of labeled brands rose by around 10% when the labels were applied; sales rose between 16-33% when the label was combined with price markups of 10-20%. The market shares of the brands rose by 20-41% when they were labeled and offered at a price premium.

  36. Against corporate reductionism: role of pioneers • A large minority of firms pursue social goals (cooperative firms and “social market entreprises”). • The Junus example (goal:credit access to “non bankables”. Today more than 3000 MFIs with more than 150 million borrowers) • Firm creation may depend on “solidarity spirits” as well as “animal spirits”

  37. The role of non profit maximising banks in Europe and the World (1/2) • International Cooperative Bank Association which includes banche cooperative and banche popolari in Italy, building societies and credit unions in the UK, mutual savings and loans and credit unions in the US. • International institutions such as the World Bank and the International Monetary Fund act in practice like non profit maximizing financial institutions (Canning et al., 2003). • NPM banks account for 33.7% market share in deposits and 29.5% in loan volumes in the Italian banking industry and represent in terms of branches 60% of the total in France, 50% in Austria and about 40% in Germany and the Netherlands (Bongini-Ferri, 2007). • In 2007, EU cooperative banks held an average market share of 25% for loans to small and medium enterprises (SMEs), while an average of 29% of their loans were SME loans (Source: EACB).

  38. The role of non PM banks in Europe and the World (2/2) • At world level financial cooperatives serve over 621 million people in the G-20 nations alone, “provide US$3.6 trillion in loans, hold US$4.4 trillion in savings and have US$ 7.6 trillion in total assets.”[1] • Among top 50 Rankings by shareholder equity in 2008 the first coop bank is Crédit Agricole ranked 7th, followed by a series of banks ranking from the 20s to the 40s such as Rabobank, Caisse d’Epargne, Banque Populaire, Crédit Mutuel. • Beyond these figures interest of academicians, politicians and readers toward non profit maximizing banks is increasing after the global financial crisis in which the specific characteristics of this kind of banks seem to have protected them better from the crisis. • The multistakeholder bank subject to market discipline is the winner over private profit maximising and public banks in the financial crisis om http://icba.free.fr/IMG/pdf/G_20_MARCH_09.pdf accessed 30 April 2009).

  39. The role of ethical finance • Ethical banks • Microfinance • Ethical investment funds

  40. 11 of the world’s leading sustainable banks, with a combined balance sheet >$14bn, and >7m customers in 20 countries

  41. Western ethical banks seem to have a rather centralized structure, with very few branches or offices, and a relatively low number of personnel. They are highly reliant on internet banking for deposits and payment services. • Southern poverty-alleviation banks (which are all poverty-alleviation banks except for Shorebank) are organized totally differently as they are characterized by a far larger number of branches/offices and bigger number of co-workers. • Table 4: Number of co-workers per US$ 100 m assets

  42. Table 3: Size and structure of the GA banks at the end of 2008

  43. Table 5: Balance sheet total and growth

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