Address by Alexander Rinnooy Kan at conference 'Sustainability in the Financial Sector: Are We Ready? A celebration of the 65th anniversary of Nyenrode Business Universiteit', 24 November 2011
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You will have undoubtedly heard of the worldwide Occupy movement. Since 15 October 2011, Occupy protestors have also been camped out in various cities around the Netherlands. The Dutch protestors are following the example of Occupy Wall Street, which set up its camp in Zuccotti Park in New York City on 17 September 2011. The Occupy Wall Street movement is a protest against economic inequality in the United States. Some of the Occupy camps have been cleared now for safety reasons, but the point is that they are sending a message, and that message is clear. The protesters are demonstrating against corporate greed, on Wall Street and at other big financial institutions. They blame the financial crisis that has plagued the world since 2008 on the greed of the financial sector. The Occupy movement is fuelled by acute feelings of unease about economic inequality, the erosion of social and economic progress, and the huge influence of multinational corporations on political decision-making – an influence that is increasingly being thought of as a threat to democracy.
Ladies and gentlemen, we are all feeling the impact of the financial and economic crisis. Some countries are teetering on the brink of failure, while others are losing their triple A rating. The Netherlands’ performance has been relatively good, at least until recently. Our unemployment rate is relatively low, and our credit rating is safe. But the Netherlands cannot hide behind its dikes. With the global economy growing more and more interlaced, these crises cannot fail to impact an open economy like the Netherlands. And the crises have indeed made themselves felt here. Uncertainty about the Europe’s ability to solve the debt crisis is growing; solidarity no longer goes without saying; and increasing polarisation is making it difficult to take decisions.
We must also not forget the other crises affecting our world: the food crisis, the climate and energy crisis, and the growing scarcity of many of our natural resources. As Dutch economist and leading commentator Herman Wijffels observed: “We are eating into the principal of our natural capital, when we ought to be living off the interest.”
It is not only the financial sector that is facing transition, then, but the entire economy. Sustainable growth should be the guiding principle at every step of the economic process. We need to work towards an economy in which we no longer shift the burden to others. Companies should not pass on the negative effects of their investments to the environment or biodiversity. Consumers should not pass the negative impact of their demands for luxury and convenience to future generations. And, as the Occupy movement is emphasising, the richest 1% should not pass on the risks of their financial speculation to the rest, the 99%.
And yet, financial institutions do have a unique role to play. It is not only their own business processes that they must make sustainable. Their impact on the capital market has given them and other major investors a growing influence on the policies of other companies. The financial sector is therefore also responsible for ensuring that other segments of the economy adopt sustainable practices.
I will first consider the sustainability question that we are all facing, and then look more specifically at the financial sector.
The challenge of making a smooth transition is an enormous one. It is placing a heavy burden of responsibility on our generation. Fortunately, most of us are aware of this. Society is making growing demands on businesses. The licence to operate requires more than simply complying with the law. Companies must be receptive to the public’s views. They must accept responsibility for the consequences of their behaviour, not only in their home countries but elsewhere, and not only for the current generation but for future ones. And companies are increasingly being held to account, by consumers, by the public, and by interest groups.
Legislation is a necessary tool in all this and can be a highly effective one – but the law also has its limitations. Environmental pollution, dwindling natural resources, and child labour are all issues that must be considered in a global context. The globalisation of the economy and the opportunities of ICT have indeed turned the world into a global village. The government is in retreat, and its power is waning.
There are other reasons why the struggle for sustainable globalisation is not exclusively a government affair.
- The internationalisation of product chains makes multinationals one of the drivers behind the globalisation process, and they therefore bear a certain responsibility for shaping that process.
- Companies can make an important contribution to sustainable development by practising sustainability in their normal production processes and by exploiting the enormous potential of knowledge and innovation.
- Companies can pressure suppliers in foreign countries where rules are lacking or are not properly applied, for example with respect to basic human rights and fundamental labour standards.
Our conclusion, then, is that we can make more progress toward sustainability through corporate social responsibility. And we are in fact doing so. Many Dutch companies are tackling abuses by pursuing an international corporate social responsibility policy. Examples include the certification of “conflict-free” coltan from the Democratic Republic of Congo, and the Round Tables on sustainable soy and palm oil, meant to oppose deforestation and promote fair trade and decent employment terms for workers in developing countries.
In December 2008, the Dutch employers’ confederations and trade union federations united in the Council signed the Statement on International Corporate Social Responsibility (ICSR). In this Statement, Dutch trade and industry undertakes to adhere to a normative framework governing the international aspects of corporate social responsibility and supply chain management. In other words, the Statement concerns the sustainability of international production chains. For companies, that means working to improve the social and environmental performance of their own operations and the operations of their suppliers. The social and environmental standards to which Dutch trade and industry has committed itself have been incorporated into the normative framework of the Statement. That framework also includes the ILO’s fundamental labour standards and the OECD Guidelines for Multinational Enterprises.
As you can see, the Social and Economic Council is working diligently to develop tangible guidelines for sustainable enterprise. Our progress in the matter of international corporate social responsibility will be evaluated in 2012. The Dutch House of Representatives will also be issuing an opinion. A commitment to international corporate social responsibility is voluntary but not free of obligation. Is that enough, or is legislation required? That is the question.
Let’s ask the same question in relation to the financial sector. Is a commitment to international corporate social responsibility sufficient in that sector? Or is government regulation required?
According to a study conducted by MVO-Nederland in 2007, financial service providers were still in the vanguard of corporate social responsibility back then. After two financial crises, however, most people now have a very different view of them. I'm sure all of you are aware of the financial ploys that allowed some in the sector to enjoy huge incomes while customers and even the general public paid the price.
A healthy financial sector is of vital importance to the Netherlands. That importance, however, cannot be assessed primarily in terms of the employment rate or how much people earn. On the contrary, the failure to properly recognise or assess risks led to the financial sector being viewed as much more valuable to the economy than it actually is. The banks managed to increase their return on investment in recent years by running more risk, without making provision to adequately cover that risk. And misjudging that risk led, logically enough, to a statistical overemphasis on the role that the financial sector plays in the Dutch economy.
The financial services sector should serve that part of the Dutch economy that is concerned with actually producing goods and services – the real economy, in other words. Its top priority should be to guarantee the practicalities of money transfers. We can also regard “regular” loans to companies and individuals as goods and services essential to the normal functioning of the economy and society.
That is not something that requires a lot of innovation. And so in recent years, much of the innovation in the financial sector took the form of “repackaging” risk in a way that concealed it – either intentionally or unintentionally – from many people, until it revealed itself in all its enormity and vehemence in the financial crisis.
Initially, the financial sector was reluctant to accept blame. In its report of May 2010, the De Wit Committee said:
“While carrying out its investigation, it struck the Committee that among those who bore responsibility in the financial system during the run-up to the crisis, a considerable number showed little sign that they were critically examining their own role in causing the problems and their failure to act preventively. …It is important for the financial sector to develop a vision concerning its future and the responsibility that it bears to society in that regard.”
That vision is now in place. The Maas Committee has issued a long list of recommendations aimed at restoring confidence in the financial sector. “The underlying theme of the report is that, when weighing up the interests of their customers, their shareholders, their employees and the society in which they operate, the banks must once again put their customers’ interests first. That will allow them to play a more effective role in society. It will also be advantageous for their employees and their shareholders. What must no longer happen is for banks to pay out their profits as shareholder dividends and executive bonuses while taxpayers, customers, and employees are obliged to foot the bill. The banking industry must undergo a basic change in attitude and a reorientation.”
That reorientation has been laid down in a code of conduct: the Banks Code of 2009.
Where do we stand with the Code? The progress report published last year shows that, while its implementation is clearly under way, there is still much work ahead. In the interim report published in September, the Committee states that, while a reasonable number of banks have already complied with the Code’s provisions concerning executive salaries, there is little indication of widespread or full compliance. So there is still much work to be done.
The banks still defend bonuses by claiming that they would otherwise be unable to attract skilled and experienced executives. The culture is therefore being maintained. We have to start dismantling that culture somewhere. When we embarked on our International Corporate Social Responsibility project, we faced a comparable dilemma. Dutch companies compete with companies in other countries where standards are much lower. Dutch companies showed their leadership at that point and chose the route of sustainability.
The financial sector must follow that example. The progress report on the Banks Code is due to be published shortly. It would be advantageous for the sector to get good marks on that report. Otherwise, there will be further calls for legislation. We talk a lot about political factionalism, but if there’s one issue on which all the political parties – from far right to far left – agree, it’s the need for far-reaching changes in the structure, culture, and conduct of the financial sector and for a better division of responsibility within that sector.
Paul Volcker, former chairman of the Board of Governors of the Federal Reserve System, had some interesting thoughts on this topic. In his opinion, banks that perform certain basic tasks for their customers, be they consumers, businesses or government – for example payments, savings, and loans - should be prevented from investing the money entrusted to them in speculative ventures that are not primarily in their customers’ interest. These “system banks” would co-exist with investment banks, which would be permitted to run more risk.
Not too long ago, Herman Wijffels also took steps to set up a Sustainable Finance Lab, a series of discussions between a dozen or so economists concerning the current situation and possible solutions leading to a robust, sustainable financial sector.
Fortunately, ladies and gentlemen, there are also positive developments to report. Financial institutions such as ASN and Triodos have made socially responsible investing a priority. According to a recent study by the VBDO, an association of ethical investors, pension funds are increasingly opting for socially responsible investments. It is only the smaller pension funds that lag behind.
Socially responsible investment is by no means financially disadvantageous for investors. Indeed, various studies on socially responsible investing show that there is no significant difference between sustainable and non-sustainable investment funds.
Does socially responsible investing also benefit people and the planet? It’s difficult to tell. Banks and insurance companies get above-average marks in “The Crystal”, a transparency benchmark, but the products concerned are not only those that promote social prosperity; they are also products in the “do no harm” category. Social prosperity would be served if we could document and analyse the actual performance of socially responsible investments.
Ladies and gentlemen, a large number of Dutch companies are already showing us that corporate social responsibility is the way forward to a sustainable society. Can the financial sector follow their lead? The sector can and must prove itself, now more than ever. We have arrived at a turning point in modern business management. Companies that wish to secure their future must do more – much more – than merely comply with the minimum acceptable standards. Sustainability is becoming a genuine requirement for long-term profitability.