Social market enterprises and their contribution to environmentally sustainable development

1. Social market enterprises and their contribution to environmentally sustainable development Leonardo Becchetti University of Tor Vergata, Rome Econometica Banca Popolare Etica

2. Structure of the presentation 1. Why corporate responsibility is important to make growth socially and environmentally sustainable 2. The role and contagion effects of “pioneering” social market enterprises (give me a lever…) Fair trade Microfinance Ethical banks Ethical investment funds 3. Conclusions

3. One month ago in Bejing….. And 50 kilometers off the city….

4. Population with less than one dollar a day in PPP

5. A source of turbulence: North-South skill adjusted wage gaps • Skill adjusted wage in western countries Currency appeciation Socially responsible consumption Antidelocalisation agreements Skill adjusted wage in LDCs

6. About corporate responsibility • CSR is a shift of firm focus from the maximisation of shareholders value to the satisfaction of a wider set of stakeholders (customers, workers, suppliers and their manpower, local communities, future generation through environmental concerns, etc.) • It is what the firm does beyond legal obligations • It is stimulated by “portfolio votes” of socially responsible consumers (Samuelson-Nordhaus) • It is a complement and not a substitute of rules and institutional reforms • “Portfolio vote” is a matter of longsighted self-interest not altruism

7. CSR and globalisation • social responsibility emerged in Europe as an “endogenous reaction” of the socioeconomic environment to the fall of the old system of checks and balances through which corporations, domestic trade unions and domestic institutions ensured the joint pursuit of economic development and social cohesion. • With socially responsible consumption citizens learned to vote everyday with their portfolio, thereby significantly increasing their degree of active participation to the political and economic life. • Their bottom-up pressure stimulated socially responsible practices of corporations which aimed to conquer the emerging group of “concerned” consumers.

8. Costs and benefits from SR for corporations (synthesis of literature results) • Costs: higher benefits from stakeholders different from shareholders • Potential benefits: i) demand of SR consumers; ii) reduced transaction costs with stakeholders; iii) leadership in energy saving innovation (STM case); iv) higher productivity of intrinsically motivated workers; v) signal of product quality under asymmetric information

9. Empirical (econometric) literature on CSR effects in economics CSR firms tend to perform better in terms of value added than profit vis à vis non CSR firms Exit from CSR stock index is progressively becoming bad news in stock markets Ethical investment funds are less risky than their non ethical traditional counterparts

10. A concrete example on how corporate responsibility may defend consumer rights • In banks the profit maximising focus creates stress on officiers which, under asymmetric information, may be tempted to pass losses to customers in order to increase bank profits(i.e. Italian scandals of sales of priceless bonds (Parmalat), sale of speculative derivatives without proper information to local public administrations and small firms which led to huge losses and fines from regulatory authorities, etc.)

11. What are social market entreprises (1) • Private firms with a primary social goal competing in the market with traditional profit maximising corporations • Examples: fair trade importers, (not for profit) microfinance institutions, ethical banks. • Some of them in economic systems are good (like flavour in a salad). They are not the recipe for growth but good to make growth sustainable

12. What are social market entreprises (2) • Firms with a specific social goal (promoting inclusion) which compete in the market with profit maximisers and are “contagious” generating partial imitation • SME overcome the traditional dichotomy between creation of economic value (with likely negative externalities) and redistributive or inclusive policies aimed to correct the distortions introduced in the moment in which economic value is created • They increase work satisfaction of intrinsically motivated workers (people working in these firms are generally happier – if the avoid excess of expectations - even if they earn more)

13. Anthropological and corporate reductionism • All individuals are “myopically self-interested” and pursue only monetary or material goals • All entrepreneurial activities have profit maximisation as their own goal

14. Against anthropological and corporate reductionism • 1. A huge number of lab and natural experiments document that individuals are also driven by emphaty, moral committment and social norms • 2. A large minority of firms pursue social goals (cooperative firms and “social market entreprises”)

15. SME and CSR beyond “reductionism” • Beyond the dichotomy of the self-worker and the self-consumer • Positive market share and empirical findings of nonzero willingness to pay for the ST features of FT products (Becchetti-Rosati, 2005) reveals that consumers are not homines economicy or “rational fools” (Sen, 1976) • Among alternative microfundation of economic agents our findings seem to support especially altruism, fairness and inequity aversion (Frey, Fehr-Schmidt, Sobel) or long-sighted self interst [and less reciprocity]

16. A first example of SMEs: fair trade

17. Fair trade value chain Importers associations Producers and first level producers association World Shops “concerned” consumers

18. An example of social market entrepreneurs: fair traders • Fair trade schemes use consumption and trade in an aim to promote inclusion of poor farmers in global product markets through a package of benefits which include anti-cyclical mark-ups on prices, long-term relationships, credit facilities and business angel consultancy to build producers’ capacity • NOT TO BE CONFUSED WITH fair trade generally referring to the absence of duties, controls and dumping practices in international trade (Mendoza - Bahadur, 2002; Bhagwati, 1996; Stiglitz, 2002; Suranovic, 2002)

19. IFAT criteria • Creating opportunities for economically disadvantaged producers. • Transparency and accountability. • Capacity building. • Promoting Fair Trade. • Payment of a fair price. • Gender Equity. • Working conditions. (healthy working environment for producers. The participation of children (if any) does not adversely affect their well-being, security, educational requirements and need for play and conforms to the UN Convention on the Rights of the Child as well as the law and norms in the local context.) • The environment. • Trade Relations. Fair Trade Organizations trade with concern for the social, economic and environmental well-being of marginalized small producers and do not maximise profit at their expense. They maintain long-term relationships based on solidarity, trust and mutual respect that contribute to the promotion and growth of Fair Trade. Whenever possible producers are assisted with access to pre-harvest or pre-production advance payment.

20. Fair trade culture… • …is more in favour of a positive vote than a negative vote • Fair trade is again child labour ban and creates conditions for the removal of child labour (wage premium for parents)

21. Price breakdown of a FT product Price of 250 gr UCIRI - Union Comunidad Indigenas de la Region de Istmo (Messico) - coffee

22. New data • in 2005, sales of products certified as fair trade ones were estimated at €1.1 billion worldwide, a 37 % year-to-year increase • European FT net sales grew by 20 percent per year in the last five years and that in 2005, • Significant market shares in specific sectors such as bananas in Switzerland (47%) and the ground coffee (20%), tea (5%) and bananas (5.5%) in the UK

23. The cultural role of FT • Consumers’ vote with portfolio extends participation • Creation of economic value with values overcomes the traditional dichotomy • FT gives more dignity to the market ! • Differently from charity it is contagious

24. An example of contagion (1)BBC 7 October 2005 (1) • Nestle has launched a fair trade instant coffee as it looks to tap into growing demand among consumers. The firm is the first of the four major global coffee firms - the others are Kraft, Sara Lee, and Procter & Gamble - to put out such a product in the UK. • Ethical shopping is an increasing trend in the UK, as consumers pay more to ensure poor farmers get a better deal. • But the involvement of a leading multinational has proved controversial among the aid and development workers. • Fair Trade is quite clearly growing enormously in terms of its awareness. Fair trade has been growing at good double-digit growth and continues to grow." said Fiona Kendrick, Nestle's UK head of beverages.

25. An example of contagion (2)BBC 7 October 2005 (1) • Fair Trade is quite clearly growing enormously in terms of its awareness," said Fiona Kendrick, Nestle's UK head of beverages. • "Specifically in terms of coffee, fair trade is 3% of the instant market and has been growing at good double-digit growth and continues to grow." • Other companies have also recognised the importance of ethical brands. • Proctor and Gamble launched a FairTrade coffee brand in the United States in 2004 under its Millstone label.

26. Three critical points on FT • Distortion of market prices leading to excess production ? No, creation of new variety of product, against monopsony • Less efficient than buying standard product + charity ? Does not consider contagion, antitrust action and other related effects • Worsen condition of local non FT producers ? Our evidence in Perù and Kenya says generally no

27. Benchmark empirical analyses in FT literature • Consumers ethical premium depends on knowledge of FT criteria, cohort effect (Becchetti_Rosati, Wec 2005). • FT impact in Kenya significant on standard of living, wages, consumption but not on child education (Becchetti-Costantino 2007 WD) • FT impact in Perù: higher yields of FT producers are transferred on consumption and child education, positive effect on happiness (forthcoming)

28. Open issues: the dynamics of FT market Imitators ATO 3 FTO label 5 2 4 1 3 Flo World shops Supermarkets

29. Open issues in FT • Asymmetric information on the ethical element of FT product is not an “experience good” • Labelling organisation bridge the information gap • Competition between pioneers and partial imitators is also on labels • Innovation along the value chain (El Guabo)

30. A second example: ethical banks • Example of Banca Etica: seven year hold, 800 million euro deposits, 4 million and a half shareholders, “higher interest is the interest of all”, priority to social value of financed loans (microfinance, social entreprises, environmental restructuring, Excos). IAS reform led to a revaluation based on the ethical premium • It creates imitation: the 2° Italian bank group (Intesa-S.Paolo with 24 million deposits) will create next Monday its own Banca Etica (Banca Prossima) with 100 million equity capital

31. Ethical banks are at the frontier in innovation and financing of socially and environmentally sustainable projects • Energy saving companies: creating ec value by reducing environmental impact • Zeri org • Waste recycling

32. A third example of social market entrepreneurship: modern microfinance • Yunus experiment the effects of lending small sums to poor borrowers without asking collateral (in 1976 with 27 dollars he could lend to 42 bamboo workers which needed 22 cents each to buy raw material for their work) • The Grameen Bank has now six million borrowers and the Microcredit Summit Campaign at end 2006 documents the existence of 3,133 microfinance programs around the world reaching approximately 113 million borrowers and, among them, 82 millions in straight poverty conditions.

33. The role of microfinance • It promotes access to credit for the “unbankable” • It creates equal opportunities and promote the matching between those who have ideas and those who have money to finance them • It supports inclusion and creation of ecomic value on a wider population base

34. The rise of modern microfinance (2) • The most outstanding element of the performance of MFIs is their extremely low share of nonperforming loans. According to the most systematic source of aggregate data on MFIs, - the MicroBanking Bullettin (http://www.mixmbb.org/en) which created a panel of 200 MFIs from different world continents – the average MFIs loan loss rate was 1 percent in 2005.

35. Reasons for the astounding performance (1) • One of the most important keys of success is considered to be the group lending/joint liability mechanism • The bank provides small individual loans to a self-selected group of borrowers and enforces a contract in which the default of one of them implies penalties for the other groupmates. • In a framework of asymmetric information this creates an incentive for virtuous group selection(assortative matching) among potential borrowers (no one want to mix with unproductive groupmates in order to minimize the probability of paying the penalty) before and peer monitoring after the loan has been provided

36. Reasons for the astounding performance (2) • Problem: some successful MFIs (and the same Grameen after its 2000 reform and the start of the Grameen II system) do not use joint liability !! • Two alternative explanations • 1) Berger-UdellUdell (2002): key role of loan officers who accumulate soft information which is crucial to assess creditworthiness of small businesses

37. Reasons for the astounding performance (2) • 2) the unique opportunity of rise in dignity cannot be lost by borrowers… • “The rich can evade the consequences of non-payment; the poor cannot. They value access to credit so highly, and dislike the loan sharks so much, that they are only too grateful for a once-in-a-lifetime opportunity to improve themselves.” • Mohammad Yunus

38. MFIs promote inclusion and are effective in recovery after shocks (our findings on the field before an after tsunami for a sample of MFI borrowers) (post.tsunami effect of microfinance refinancing in Sri-Lanka)

39. A fourth example of social market entrepreneurs: ethical investment funds • Ethical investment funds select investable stocks on the basis of social and environmental sustainability criteria

40. SRI in the US - 2005

41. Mutual Fund Flows: Equity Funds

42. Mutual Fund Flows: Fixed-Income Funds

43. Government policies to support corporate responsibility • Procurement rules with points for social and environmental responsibility of competitors • Creation of a social rating system (if we have financial rating why shouldn’t we have social rating as well?) as a fulfillment of consumer rights (right to be informed, right to choose, etc.)

44. What SR media should do • Weight importance of corporate actors in terms of contribution to sustainable development (more room for SMEs) • Campaign for the reforms which support political rules which enhance CSR (see slide above)

45. SME and Keynes prophecy • "For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.“ John Maynard Keynes "The Future", Essays in Persuasion (1931) Ch. 5 With SMEs which create economic value in SR way fair is also useful and we can see the light beyond the tunnel …

46. Conclusions • (Consumer and corporate) social responsibility is crucial for the sustainability of economic development today… • …and greatly contributes to happiness of workers and consumers (having a social goal gives a deep sense and motivation to what you do) • The joint goal of SME: external beneficiaries and life satifaction of workers in global economy

47. Conclusions (2) • There is only one problem….and only one solution…. • If 80 percent of the population would donate a sum of money …. • If 80 percent of the population chooses product A instead of B and C due to its socian and environmental features

48. Main Author’s references • Becchetti L. Huybrechts B., 2007 The dynamics of Fair Trade as a mixed-form market CEIS working paper, Journal of Business Ethics, (forth.) • Becchetti, L., Costantino M., 2007, The effects of Fair Trade on marginalised producers: an impact analysis on Kenyan farmers, World Development (forth.) • L.Becchetti F.C. Rosati, 2007, Globalisation and the death of distance in social preferences ad inequity aversion: empirical evidence from a pilot study on fair trade consumers, CEIS Working Paper, n.216 and World Economy (forth.) • L. Becchetti, S. Di Giacomo, D. Pinnacchio, 2007, The impact of Social Responsibility on productivity and efficiency of US listed companies, CEIS Working Paper n.210 andApplied Financial Economics (forth.) • Becchetti L., Giallonardo L., and Tessitore M.E., 2007, On ethical product differentiation, Rivista di Politica Economica • Becchetti L., Trovato, G., 2005, The determinants of child labour: the role of primary product specialization,CEIS Working Paper, n. 170 Labour

49. Author’s references (1) Leonardo BECCHETTI La felicità sostenibile Economia della responsabilità sociale Donzelli editore In uscita a Settembre 2005

50. SME and the reputation of the market • Does the market erodes social virtues ? “commodification” (Marx and Hirsh, 1976), “depleting moral legacy” and “tyranny of small decisions” (Hirsch, 1976) crowding our of intrinsic motivations (Frey) • The market has not always negative moral consequences: moral consequences of growth (Friedman, 2006), self generating flow of altruism (Arrow, 1972), “countermovement” (Polanyj, 1957) • FAIR TRADE REVOLUTION: creates value with values and uses “commodification” to generate social values