ethics and sustainable development: conflict of interest or success story? - irene tosti

8/6/2019 ETHICS AND SUSTAINABLE DEVELOPMENT: conflict of interest or success story? - Irene Tosti

1/26

Thesis written in the context of the

Certificate of Advanced Studies in Environmental Diplomacy

University of Geneva / UNEP

ETHICSAND

SUSTAINABLEDEVELOPMENT:

Conflict of Interests orSuccess Story?

Irene TOSTI

2008


2/26

2

TABLE OF CONTENTS

INTRODUCTION

PART I

THE INTANGIBLE IN HUMAN NATURE

Ancient civilisations versus multinational corporations

Corporate Assets and Corporate Values: Business Ethics

A more equitable Shareholders Value: local communities IN

multinational corporations

SUSTAINABLE DEVELOPMENT

The concept that turned into a label

Surfing the financial crises of the last decade

The financial crisis of 2007 and 2008: the perfect storm?

PART II

THE ROLE OF DIPLOMACY

Upgrading the financial and economic systems in sync with theenvironment

Towards Bretton Woods II: the last frontier of Financial Diplomacy

CONCLUSIONS

Ethics and Sustainable Development: conflict of interests or successstory?


3/26

3

Be careful of how you think And how you speak

Because it may becomeThe prophecy of your life

Saint Francis of Assisi


4/26

4

INTRODUCTION

In the Western world we tend to consume rather then appreciate life.Our consumer-mania has been expanding to the intangible, turning us into consumersof emotions and perceptions. By flattening their intensity we have minimised ourexposure to feelings and have watered down the true essence of human values.

Anxiety permeates our unsustainable way of living and has consistently reinforced thisemotional desertification. We are squeezed between the wish of leading a fulfilling life and the fear that the never-ending supply of data by the media may lead to an overproduction of feelings. We havemasterly developed the ability to confuse real life with virtual life, so that something thatis real may not really hit us because we (want to) perceive it as virtual and vice versa.This process makes us lead an even more isolated existence, not being able to share withothers the same perception of the virtual elements in our life.

The youngest among us are already known as the Me Generation. This generation,though, will have to face the worst effects of ecological degradation and the largestmigration flows ever; they will need to share and care for each other.

History will remember us in the Western world as the Slothfuls of the 21st century:addicted consumers and greedy investors who did not care for anything but their owninterests. As Mr DEscoto, UN General Assembly President, said on 12 November 2008 to worldleaders: One of the most burning problems today is that half of the worlds populationsuffers level of poverty, malnutrition and hunger that violate their human rights and basic dignity despite humankind having the collective knowledge and the financial and

technological resources to cure these afflictions .1

The three F crises that we have been experiencing from mid 2007 onwards, the Food,the Fuel and the Financial one, are clear signs that our unsustainable way of living isfalling apart like a house of cards.The introduction of more equitable governance systems on local and global level, andthe effective review of the United Nations mandates, including the review of the Bretton Woods institutions, must be carried out with courage and determination.

Finance makes possible that execution and settlement of a sale agreement do not occursimultaneously: this simple function has become an integral part of our life andcontributes to wealth creation.In recent years, though, the overexploited human ambition towards excellence, together with the insatiable appetite for wealth and power have changed Finance into a sort of self-ruling and self-feeding mechanism that is able to produce money also without aproper link to the underlying transactions.The current financial crisis has proved this evolution being unsustainable and I strongly believe that Finance needs to further evolve now into a tool with the flexibility to

1 UN News Centre. Top UN officials tell world leaders it is time for action in fight against global woes, www.UN/GLOBAL/FINANCIAL/TASKFORCE/story/UN/18Nov08.html


5/26

5

integrate non-monetary values into the existing framework: this will include accepting acertain level of complexity and recognising that values and principles cannot be labelled with economic terms.I agree with Calestous Juma when he says that a new international regime of financialdiplomacy should be established 2 and would extend its agenda to the definition of methodologies for the assessment of non-monetary values and principles, includingcommunity-related and environmental aspects, as well as the interests of the cominggenerations.

To wrap up: this paper has the objective to promote the debate on Business Ethics andFinancial Diplomacy and outlines a number of considerations on the upgrade of thefinancial and economic systems in sync with the environment.The first part of this paper deals with Business Ethics and Sustainable Development; thesecond part is about the role of Diplomacy, with a special focus on Bretton Woods II andFinancial Diplomacy.

2 Calestous Juma. Global economic crisis and financial diplomacy emerging issues in global governance UnitedNations General Assembly, New York, 30 October 2008


6/26

6

PART I

THE INTANGIBLE IN HUMAN NATURE

Ancient civilisations versus multinational corporations

The Ancient civilisations put great value on the intangible in human nature, identifyingconcepts that have survived history.This is the case of the Greek philosopher Aristotle who defined devices in the art of rhetoric like ethos, pathos and logos. 3 I would explain them as follows:

Ethos: the living spirit of truthPathos: the passionate connection to emotionsLogos: the data and imagining tool.

The Romans also dealt quite a lot with the intangible in human nature while busy conquering the world. They borrowed the term Ethos and coined Ethica, the moral

philosophy and the set of fundamental values that drives humans.Interestingly, the male society at that time showed strong moral excellence; the Romanleaders were appreciated by the military structure according to their Virtues.The sense of belonging of the average soldier to their legions and the completeidentification with their leaders values made the army powerful and often invincible.The great Roman Virtues can be defined as follows:

Dignitas: the mighty combination of charisma, reputation and influencePietas: the capacity of service and devotion to family and the community Gravitas: consistency, the weight of the personality, and sense of responsibility Iustitia: the sense of equity, the moral worthiness of things.

Values and honour, however, did not prevent the Romans from turning into a decadent

society that eventually collapsed.In The Prince Niccol Machiavelli states: If one looks for the first signs of thedownfall of the Roman Empire it will be found to have begun with the hiring of theGoths as mercenaries. From that beginning the armed force of the Roman Empirebegan to be weakened, and all the virtue taken away from it was given to the Goths. I conclude, therefore, that without having ones own soldiers, no principality is safe.On the contrary, it is completely subject to Fortune, not having the virtue that defendsit faithfully in adverse times. 4

As a matter of fact, the armies of the Ancient world are great examples of discipline anddedication to the multinational corporations of today and not surprisingly, the AncientGreek tools of persuasion in the art of rhetoric and the most appreciated Roman virtueshave been happily translated into Corporate Assets and Corporate Values.If we project Niccol Machiavellis statement into todays business life we will discoverthat the modern corporate world has made exactly the same mistake of the Romans:global corporations have thought that setting common values for their workforce worldwide would have made governance smoother.

3 George A. Kennedy. Aristotle On Rhetoric': A Theory of Civic Discourse, (trans./ed.) 1991, New York/Oxford, OxfordUniversity Press4 Niccol Machiavelli. The Prince, 1513, Chapter XIII Of auxiliary, mixed, and citizen soldiers; translation by PeterBondanella, reissued 2008, Oxford Worlds Classics, p. 49-50


7/26


8/26

8

Please find an example of the Compliance structure of a multinational corporation below.

Source: www.daimler.com 6

Business Ethics is extensively defined in documents like the Integrity Code and the Codeof Ethics 7 that outline the rules of conduct for employees and executives who shallcommit to ethical behaviour and value-based management.This, in turn, is supposed to create an atmosphere conducive to mutual consideration,Corporate Social Responsibility and Sustainable Development.

In reality, Corporate Values have been forced into the one-size fits-all approach withthe objective of satisfying the simplified global vision of corporate top executives. As aresult, single individuals perceive Corporate Values as something that has been deprivedof any link to their own intangible.This simple fact leads to a limited impact on business life of Corporate Values andBusiness Ethics as a whole, despite the so smartly evoked Ancient values.

In my opinion Business Ethics as a stand-alone tool cannot effectively balance theultimate goal of a corporation, namely maximising the Shareholders Value. It would besatanically nave if we would believe this.Even though Corporate Values are part of the employee assessment process of any multinational corporation, I experienced - as a former senior executive - that what really drives employees and executives is the incentive structure. And this is based on growthand profit. As Joseph Stiglitz so nicely says: Short term asymmetric compensation schemes onlong term risk taking. 8

In the most recent years the definition of growth and profit has been extended tosustainable growth and sustainable prosperity, literally meaning long lasting growthrates with long lasting positive bottom lines: nothing but a broader horizon of cashflows.

6Daimler AG, Compliance Framework, http://sustainability2008.daimler.com

7 Pursuant US law: Section 406 of the Sarbanes-Oxley Act of 2002 8 Joseph Stiglitz. The global economic outlook for Europe and the U.S., 6 October 2008, University of Geneva, UniDufour, Geneva


9/26

9

If we want to make Business Ethics effective we must come to terms with Shareholders Value by changing among others - the set of rules defining Corporate Governance.

One of the objectives of Corporate Social Responsibility is representing the interests and values of the local communities who are affected by business operations. Thecommunities, though, are outside and not inside the corporate structure.

We must bring the local communities IN the corporate decision making process.By introducing the representation of the local communities interests and values into theCorporate Governance structure of multinational corporations we can makeShareholders Value more equitable.

A more equitable Shareholders Value: local communities IN multinational corporations

A success story to copy and paste is the Broad Based Black Economic Empowerment(BBBEE) of South Africa 9, whereas disadvantaged communities have been given

advantages in terms of Corporate Governance.

The BBBEE set of rules is worth being investigated and can be a true inspiration forLocal Communities being represented with their interests and values within the Boardof Directors of multinational corporations. Adapting to this concept, a multinational corporation having large local operations inIndonesia, for example, shall have among their shareholders the local Indonesiancommunities who are represented in terms of equity according to the social andenvironmental impact of the corporate operations locally.

We shall call this concept the Local Community Based Economic Empowerment(LCBEE) and the main focus in developing LCBEE shall be on the following steps:

Define the stakeholders groups within corporations, local communities, NGOs,local and national authorities and others. Also: identify their role, needs andexpectations Assess the social and environmental impact of the operations and translate thisinto shares of equity to which Local Communities are entitledSet up a process for the underwriting of the equity without any outflow of money by the Local CommunitiesSet up a legal mechanism for the representation of the Local Communitiesinterests and values (trust entities and others)Set up knowledge sharing centres to promote the use of best practices at nationaland international level: the centres shall also act as watchdogs of unlawful behaviour (also corruption-wise).

For the sake of brevity I am not going to explore the full potential of the LCBEE concept.Nevertheless, I shall outline that the LCBEE concept demands the highest ethicalstandards from politicians and corporate executives and sound measures againstcorruption.

9 The Broad Based Black Economic Empowerment (BBBEE) legislation has the objective of distributing wealth across theSouth African society


10/26

10

It is also imperative that comprehensive structures are put in place to ensure the fullintegration of LCBEE in the Corporate Governance system, such as:

The various local communities from the different countries shall be representedin the equity structure of the corporation at HQs level by a Committee of LocalCommunitiesThe organisational corporate structure needs to take into account that silostructures with reporting lines from local to regional or global HQs shall reflectthe Local Communities interests and valuesTo ensure transparency, the entire LCBEE process shall be supervised by auditing committees with local and international experts under the coordinationof the relevant Ministry of Industry and CommerceTo ensure knowledge sharing and the use of best practices (also with an eye onanti-bribery measures in the single countries) an International Chamber of LocalCommunities shall be put in place.

Last but not least: WHY shall multinational corporations be willing to donate part of their equity to Local Communities?

I truly believe that there are some good reasons for multinational corporations toembrace the LCBEE concept:To comply with national legislation on LCBEE in the hypothetical situation thatthey are included in the Regulatory Compliance Standards / best practices forCorporate Social Responsibility

And above all:To be cutting-edge market makers who are able to make competition irrelevantand demonstrate to their customer base that they have a clear vision of sustainable prosperity and Sustainable Development.

SUSTAINABLE DEVELOPMENT

The concept that turned into a label

When Dame Barbara Ward first coined the term Sustainable Development 10 shepossibly had in mind a long-lasting period of peace that would have freed people frompoverty and ignorance.In 1987, The Brundtland Report officially defined the principle of SustainableDevelopment as development that meets the needs of the present without compromising the ability of future generations to meet their own needs .11 I believe that the principle of Sustainable Development has been evolving since theninto something indefinite and vulnerable.This is mainly due to a combination of factors, such as:

The status of dynamic processThe biophysical limits within which society can developThe economic fine-tuning of wordsThe labelling of conceptsThe inflationary tendency in the use of words

10 Jonathon Porritt. Capitalism as if the world matters, 2007, Earthscan, p. 3511 The Brundtland Commission. Our common future Chapter 2 Towards Sustainable Development, 1987, OxfordUniversity Press


11/26

11

The status of dynamic process:Development per se is not a static condition and encompasses a certain level of dynamics. Recognising that Sustainable Development is a dynamic process makes itable to evolve.

The biophysical limits within which society can develop:Establishing that there are biophysical limits that can be scientifically defined andmeasured and within which society can develop gives Sustainable Development boundaries that cannot be hit.

The economic fine-tuning of words: According to the Joburg memo Fairness in a Fragile World of 2002: It was politically expedient for everybody not to question the development-as-growth- philosophy 12 As a result, the meaning of sustainable has evolved from being long-lasting intobeing able to bear the weight (of development) in the long-term.

The labelling of concepts: We live in a world that we love calling global and have the conceit of condensingconcepts into global terms.The one-size-fits-all approach, in reality, is a brutal tool for the production of labels.Once the label is established, we tend to simplify and make the assumption that theconcept is the label.The label, though, can be easily designed and manipulated in favour of specificeconomic and political interests. The vast majority of people wont object because they have lost or have never known the very essence of the concept.

The inflationary tendency in the use of words:Sustainable Development is quoted very often in the recent environmental legislation

and in general in any other political paperwork all around the world; while recognisingthe noble intentions, I believe that the number of quotes is high enough to generateinflationary tendencies.The inflationary use of words erodes their implicit value, exposing them to the risk of becoming meaningless.

In my eyes, the principle of Sustainable Development was badly damaged by thesimplistic limitation imposed by the long-term growth and its consistency whateverit had become - has been seriously undermined by labelling and by the impact of inflationary tendencies in the use of words. We must realise that giving some economicdefinition to principles is nothing but insane and that the principle of SustainableDevelopment is not to be reduced to a commodity.

I believe that the definition adopted by Forum for the Future is the most comprehensiveone because it includes the status of dynamic process and the biophysical limits withinsociety can develop: Sustainable Development is a dynamic process which enables all people to realizetheir potential and to improve their quality of life in ways which simultaneously protect and enhance the Earths life-support systems .13

12Heinrich B ll Foundation. The Joburg Memo - Fairness in a fragile world, p.13


12/26

12

Surfing the financial crises of the last decade

In the early 90s we experienced a number of events that changed the world much morethan we had originally thought.They have produced an imbalance of powers that was artificially filled by the faith inself-governing economic market forces. In other words, we have been experiencing ashift of power from the national policymakers representing the interests of thecitizenship to multinational corporations representing the shareholders interests.The shift from politics to corporate and from national to multinational is like changingthe rules of the game while simultaneously changing the playing field.There is a large inconsistency between the short-term horizon of both politicians andcorporate executive and the long-lasting impact of their decisions in areas that are to bedealt with over the long-term.Medium and long-term political agendas and corporate strategic planning do not helpovercoming this issue, the reason being the personal exercise of power in politics andthe asymmetric incentive system in the corporate world.This does not necessarily mean, however, that politicians and corporate boards of

directors should have long-term mandates. It rather means that the current globalgovernance system does not satisfy the needs of the People.

The main events of the early 90s can be summarised as follows:On 3 October 1990 Germany was reunified as a result of the fall of the Berlin WallOn 25 June 1991 Yugoslavia broke up after Croatia and Slovenia declaredindependenceOn 6 August 1991 The World Wide Web becomes available over the internetOn 21 December 1991 the Soviet Union collapsedOn 7 February 1992 the Treaty of Maastricht was signed, leading the way to thecreation of the Euro

On 10 May 1994 Mr Nelson Mandela was appointed as the first black Presidentof South Africa. Apartheid was gone forever.

These historical events - directly or indirectly - broke once and for ever the status quo between East and West; the capitalist-democratic form of society and the communist-authoritarian regimes.The simple fact that Western democracies outlived the collapse of the Soviet Unionmade them appear as the winners of the Cold War.Paradoxically, the Soviet Union had preserved the West from the break out of financialcrises while being a barrier to the expansion of capitalism. After the collapse of Communism the West rested on its laurels and was not prepared for the financial crisesof the late 90s.

In 1997 and 1998 the Foreign Direct Investments in South East Asia (known as the Asian Tigers economies) changed capital allocation strategy towards the USA as soon asthe Federal Reserve started increasing interest rates.Foreign investments left behind rising real estate markets in South East Asia with thefeeling of having overexploited those markets and embraced instead US investments.

13 Forum for the Future. Formal definitions of sustainable development, http://www.forumforthefuture.org/node/327


13/26

13

The shift was systemic and produced panic across the financial markets. The real estatemarket in these countries collapsed with price levels falling dramatically. The SouthEast Asian economies suffered huge losses and have made great efforts to recover sincethen.

In the second half of 1998 the Russian stock and bond markets collapsed out of fear thatthe government would default on the domestic debt as a result of non-payment of taxes by the energy and the manufacturing industry. At the same time, the sharp decline of oilprices contributed to substantially weaken the Rubble.

Between 1999 and 2002 Argentina experienced an unprecedented financial crisis that was rooted in the countrywide corruption system and in the fixed convertibility to theUS dollar. The fixed exchange rate of the Peso to the US dollar had made the Pesoartificially strong in a country with a rising public debt; the over-borrowing in theinternational financial markets made the Republic of Argentina extremely vulnerableand eventually it went into bankruptcy.

These crises are clear examples of unsustainable behaviour, lack of business acumen

and inadequate regulation on Foreign Direct Investments (FDI) in those countries.

Further to the financial crises of the late 90s the new geopolitical dimension of North-South was added to the matrix East-West, whereby the new location of the Westerndeveloped countries is in the North and the rest of the world is in the South.Not many were expecting that the forthcoming financial crisis would have broken out inthe very North West of the world, namely in the USA.

The financial crisis of 2007 and 2008: the perfect storm?

In August 2007 the US residential mortgage market showed higher than expected losses

on the sub-prime market (so called to define lending to low income individuals). Thecrisis broke out on 6 August with American Home Mortgage filing for bankruptcy.

There are a number of factors that were conductive to the crisis from a technical point of view. I would outline them as follows:

The Federal Reserve kept the Federal Fund rates very low over a long period of time, namely from November 2000 to June 2006. Starting from 6,5% inNovember 2000, the rates reached the lowest level of 1% in July 2003, stayingthere over one full year. The Federal Reserve eventually reversed the trend andin July 2006 increased rates over 5%, keeping them steady at 5,25% over one full year until July 2007. 14

This long lasting period of cheap money made the US average citizen willing toinvest a large portion of their disposable income in real estate. According toBEA, the Bureau of Economic Analysis of the US Department of Commerce, thepersonal savings as a percentage of personal disposable income between 2006(when the rates started raising again) and the first quarter of 2008 were as good

14 Federal Reserve Statistical Release, Federal Fund effective rates from 07/1954 to 10/2008, www.federalreserve.org


14/26

14

as zero. In other words, the rate hike found US private households without any buffer to repay their mortgages. 15

Meanwhile, commercial banking had eased the credit scoring processes andoverexploited the sub-prime lending by financing also loan-to-value of over100% in sight of continuously rising real estate valuations.

Also: Fannie Mae and Freddie Mac (the large US credit guarantee providers tomortgage lenders) had their credit scoring process tightened up by new regulation with the result that commercial banking became more aggressive intheir lending strategy to sub-prime real estate owners.

Investment banking wrapped up sub-prime lending into capital markettransactions, mainly securitisation structures. These financial products wererated accordingly (usually above investment grade) and were sold globally. Thisis nothing but business as usual in the financial markets. The marketglobalisation was able to spread the risk to all countries, also exporting thesetoxic mortgages, as Joseph Stiglitz so nicely says. 16

The outbreak of the crisis triggered the collapse of the US housing market withprivate households having negative equity on their properties.

Financial products made of sub-prime residential mortgages posted more thanexpected losses and the dance of the write offs began: investors suffered hugelosses and a large number of global banks all over the world had to be rescued orat the least recapitalised by their own Government.

In August 2008 the Federal Reserve had to reverse back the trend, furtherdecreasing the Federal Fund rates to the unprecedented level of 0,11% of 19December 2008. 17

George Soros agues in his recent book The new paradigm for financial markets The credit crisis of 2008 and what it means 18 that this crisis has its origin in theInternet bubble of the end of 2000 and in the resulting behaviour of the FederalReserve. As a matter of fact, I believe that he is quite right. The long lasting low interest ratesin the US have awaken the appetite of traders and investors for higher yield assets.Finance structured products have matched the high demand for high yields and themechanism kept going until the real economy (read: the US average citizen) did nothave any money left to repay debt.This short analysis, however, only explains the US sub-prime bubble; it does notshow the entire picture.There are a number of paramount issues that we need to consider to understand if we are at a turning point of our unsustainable way of living and where are weheading.

15 BEA, Bureau of Economic Analysis / US Department of Commerce: U.S. International Transactions Accounts Datafrom 1961 to 2007: Personal income and its disposition (years and quarters) from 2006 to 2008 3Q, www.bea.gov 16 Joseph Stiglitz. The global economic outlook for Europe and the U.S., 6 October 2008, University of Geneva, UniDufour, Geneva17 Federal Reserve Statistical Release, Federal Fund effective rates as at 22 December 2008. www.federalreserve.gov 18 George Soros, The new paradigm for financial markets the credit crisis of 2008 and what it means, 2008, Public Affairs


15/26

15

Over the last decades the US current account has been traditionally in deficit,continuously rising from 1992 onwards. In particular, according to BEA, thetrade deficit increased from USD 417 billion in 2000 to USD 731 billion in 2007.Generations of economists and non-economists with a talent for common sensehave been wondering how long it would have taken for the trade deficit to become a serious problem to the US economy. 19

Matthew Higgins and Thomas Klitgaard published in December 2007 the paperFinancial globalization and the US Current Account. They explain in plainEnglish that : A countrys current account balance is equal to the differencebetween domestic saving and domestic investment spending. A country that saves more than it invests at home sends its surplus abroad to purchase foreignassets. One that saves less than it invests finances the shortfall by issuingliabilities to foreign investors. The trouble is that the US current account didnot comply with this sound assumption over many years! According to their findings: From 1999 through 2006 the cumulative US borrowing of USD 4.4 trillion amounted to some 85% of the net external financing provided by countries with surplus saving. Despite this heavy

borrowing, however, the United States has been the destination for little morethan 30% of total gross cross-border investments by other countries, a figurethat only slightly exceeds the US share of global GDPThis surprisingdevelopment is attributable largely to rapid financial globalization. 20

I find the term surprising a bit inappropriate because it is well known that inrecent years the Bank of Japan and the Peoples Bank of China - above all - haveheavily accumulated foreign currency reserves and underwritten US government bonds and US T-bills. According to an analysis conducted in 2005 by the ratingagency Fitch, China alone was predicted to be holding already by 2007 USD 1trillion in foreign exchange reserves, most of them invested in foreign assets likeUS paper. 21

I also believe that the United States has failed to attract a higher percentage of FDI because a number of countries (and investors) have not really empathised with the War on Terror launched by the Bush administration.

The Sovereign Wealth Funds (SWFs) are the new players in the internationalarena; they are supposed to be as many as forty, with the largest in Abu Dhabi,Norway and Singapore. According to Yoichi Funabashi in his recent article inForeign Affairs, the collective value of SWFs is predicted to be by USD 12trillion by 2015. 22 They have heavily invested in infrastructure, corporate andfinancial assets and, further to the financial crisis, have taken over large chunksof distressed / collapsed global banking operations, very often according torescue plans formally submitted by Western Treasuries.

19 BEA, Bureau of Economic Analysis / US Department of Commerce: U.S. International Transactions Accounts Datafrom 1961 to 2007, www.bea.gov/international/ 20 Matthew Higgins and Thomas Klitgaard. Financial globalization and the US Current Account December 2007,Current Issues in Economics and Finance of the Federal Reserve Bank of New York - Volume 13, Number 1121 James McCormack (Head of Asia Sovereigns of Fitch Ratings). Chinas Global Investment Decisions, GlobalStructured Finance Conference Fitch Ratings, October 2005, Singapore22 Yoichi Funabashi. Keeping Up With Asia Essay, September/October 2008, Foreign Affairs, www.foreignaffairs.org


16/26

16

The bail out schemes that have been launched all over the world by nationalGovernments with the intent to get a quick fix for the collapse of theinternational financial system have largely nationalised global bankingoperations. What they were not able to nationalise has been nationalisedabroad by Sovereign Wealth Funds. This is a terrific shift of power from self-governing markets to State-owned markets. The question is now: Out of thefrying pan and into the fire?

The rapid financial globalisation has made life much easier for large money laundering activities to be carried out by organised crime. Legally impeccable business activities worldwide (from leisure & entertainment to gas pipelines) arethe destination of illegal business lines human trafficking, drugs dealing,guerrilla wars, toxic waste disposal and others. With the US dollar being theglobal exchange currency and the high US trade deficit to be financed, my guessis that the huge amount of money produced by such activities is partially invested in US paper during the recycling process, despite the relevantregulation and the efforts of the police organisations worldwide.

The persistence of the US trade deficit at this level has eventually convincedinvestors that the US dollar will substantially weaken in order to hold US netliabilities at a sustainable level. As a result, investors have reduced US exposures anticipating the US dollar fall - and making the currency fall even further. TheEUR/USD exchange rate has picked up from the early days of 2002 from 0,87reaching over 1.58 in July 2008 with only a couple of wobbling hesitations on its way up. From July 2008 the EUR/USD exchange rate has decreased down to1.28 of mid November 2008 (by 1.41 by the end of December 2008), 23 as a resultof the simultaneous downward trend of crude oil prices.

The fact that the US currency is also the currency of denomination forcommodities, including crude oil, has contributed so far to support the US trade

deficit because all parties have traditionally held US dollar reserves to pay fortheir supplies. We could say that the US dollar is victim of its own success because being the global exchange currency is a two-edged blade that irrevocably links the US currency to international scenarios.

With Climate Change and the end of cheap fossil fuels the US currency is firmly linked to a widespread range of energy and environmental policies, includingsecurity policies that are mostly exogenous to the US economy andpolicymakers.

To sum up, I believe that it is time to reconsider the US dollar as the global exchangecurrency and to consider the introduction of a new Exchange Unit to denominate the value of commodities.It cannot just be a different currency (like the Euro or the Rubble or the Renminbi) because it would not change the terms of the problem: we must find a different way to fix this.

23 European Central Bank / Statistical Data Warehouse, / ECB reference exchange rates, US dollar/Euro, www.sdw.ecb.europa.eu


17/26

17

PART II

THE ROLE OF DIPLOMACY

Upgrading the financial and economic systems in sync with theenvironment

I believe that we have the ability to upgrade the economic and financial systems in sync with the environment so that they can truly benefit from each other.How do we do this? Do we have a fil rouge that shows us the way? What is the logic behind it? I shall try to answer these questions in the next pages.(I am aware that UN General Assembly President Miguel DEscoto launched in recent weeks the UN Global Financial Task Force. I am also aware that the distinguishmembers of the Task Force are among the best thinkers and the best economists in theentire world.It is therefore with great humility that I express my point of view on the upgrade of theeconomic and financial systems and Bretton Woods II)

The widespread sense of frustration among poor people around the world who do notfeel empowered by democracy and feel excluded from the redistribution of natural andeconomic resources has become a threat to world security.The demographic trend and the predicted impact of Climate Change, together with thelosses in biodiversity and water scarcity will only make things much worse.Despite the benefits of globalisation, also developed countries show a social malaiseamong people who feel that the abdication of national policymakers in favour of multinational corporations has produced the depletion of their natural and economicresources, together with the impoverishment of their values. This feeling has sharpened with the current financial crisis.

Our society has a talent for overexploiting resources; as a result we have human obesity

and starvation, climate change, and over-structured financial markets among others.This is just too much of the same thing. We need to diversify more and learn from Mother Nature who instead - has a realtalent for diversification and balance: according to the theory of limiting similarity of Sherman J. Suter, for example, species coexisting in the same habitat must differenough in size, shape, or other variables in order to minimise competition. 24

Why enhancing diversification and minimising competition should contribute toa better life for human beings?

By applying the theory of limiting similarity I can formulate the following answer: because a larger diversification of our functional tasks would generate a more equitable way of living for all of us, while making competition irrelevant would not eat upsustainable growth and profits for business.Interestingly, I can formulate the same kind of answer by applying the well-known BlueOcean Strategy 25:Exploring blue oceans of new markets and new market approaches generates valueinnovation and sustainable growth. Instead, fighting a last-ditch battle for profit in bloody red oceans like traditional markets that are overcrowded by competitors doesnot bring much forward.

24 Sherman J. Suter. Not kept apart by Competition,17 October 2008, Editors Choice of Science Signalising volume322, www.sciencemag.org 25 W. Chan Kim, Rene Mauborgne, Blue Ocean Strategy, 2005, Harvard Business School Press


18/26

18

If biodiversity and business strategy are on the same line, what is the real problem thatprevents humankind to make the necessary steps towards a sustainable way of living?I tend to agree with Niccol Machiavelli in The Prince when he says that Men areungrateful, fickle, simulators and deceivers, avoiders of danger, and greedy for gain .26 Decades of faith in self-governing market forces and globalisation policies have bredgenerations of corporate executives and policymakers who tend to copy and paste what others do. This herd behaviour protects the status quo, mitigates fear and feedstheir greed for more wealth and power. It also contributes to widen the already unbearable inequalities between rich and poor countries and generates systemic risksthat hit markets like an avalanche. We have seen this happen too often and it is time tolearn the lesson.

In the next years we may generate a variety of new concepts and re-discover old ones. What we must do now and without any further delay is setting the stage by getting the basics right:

Economy, environment, industry, climate change, finance, energy, security, food

and water are not stand-alone silos. We must realise that they are interconnectedand we need to consider them as such. We must accept a certain level of complexity and refuse the one-size-fits-all-approach; at the same time we needto put in place simple and transparent processes that ensure connectivity amongdifferent areas.

Governance models and decision-making processes shall be consistent withmission and tools. An extensive analysis of governance models should be put inplace with the objective of redesigning and continuously improving governancestructures within a sustainable framework.

An example of an unsustainable governance model is the European

monetary policy with the European Central Bank exercising its function without the European Parliament having any authority on social and fiscalpolicies, which are directly exercised by the national bodies. Thisfragmentation of the decision making process is not effective, in particularin times of financial and economic turmoil.

Another example of an unsustainable governance model is the strategic oilstock management procedures worldwide. The International Energy Agency requires its members to stock oil to cover 90 days worth of imports and torelease to each other strategic stocks in times of severe shortage. In reality,each country has its own decision making process and a differentunderstanding on how, why and when to release or increase stocks, makingthe release of oil stocks to each other a volatile process. 27

The Local Community Based Economic Empowerment (LCBEE) may beconsidered a good example of governance, as outlined in the previous pages because its governance model is consistent with the tools. 28

26 Op. cit. p. 6 of this paper. Chapter XIII Of cruelty and mercy, and whether it is better to be loved than to be feared orthe contrary, p. 5827 David G. Victor and Sarah Eskreis-Winkler. In the Tank - Making the Most of Strategic Oil Reserves, July/August2008, Foreign Affairs www.foreignaffaris.org28 Please see p. 10 and 11 of this paper


19/26


20/26

20

The triple bottom line shall be discontinued. All relevant elements shall bemonetised / (denominated in CO2 of lower emission) 32 and included in the bottom line: this with the objective of simplifying accounting and makingthe results visible and achievable.

Rating Agencies: They need to evolve as soon as possible and upgrade theirevaluation processes by including in full transparency environmental andcommunity- based impacts. A sound review of their business and governancemodel must be carried out soon; also with the contribution of the new CarbonRating Agency launched in the month of June with the support of Sir NicholasStern. 33 The update of their evaluation process would produce immediate andconcrete benefits to shareholders because it would enhance transparency andcreate awareness on non-economic processes linked to the environment and tocommunity-based practices.

Financial innovation: I believe that we cannot reject a priori the financialinnovation that has been produced in the last decades, independently from theeffects of the current financial crisis. We need to extrapolate the best practices

and adapt sound structures to the service of the communities and of theenvironment.

A good example of structured finance that could be adapted to fundecosystems and community-based activities is given by the Revolving Fundsthat are mostly used in infrastructure finance in the United States.The Australian Government, for example, has provided funding under theBush for Wildlife initiative to four not-for-profit organisations to operaterevolving funds. 34

I would also highlight a couple of environmental-only related issues, such as:

The carbon market: I truly believe that its current role should be reviewed because the logic behind it is perverse, allowing industrialized countries to keepincreasing GHG emissions, whereas poor countries will never have the same tradecapability. The carbon market should be used to trade and offset peaks of emissionsonly. The newly established Carbon Rating Agency should contribute to a higherdegree of transparency in the market.

Common tax on carbon emissions: In my opinion it should be introduced assoon as possible. Each country would keep the revenue it receives from the taxand use it to offset other taxes; lower taxes would stimulate the economy andcountries would be compliant with the polluter pays principle. Consumersmight think twice before buying a carbon intensive product and if the messagethat low carbon products are desirable gets across, companies will heavily invest in low-carbon technologies to satisfy their customers.

32 Please see p. 23 of this paper33

The Carbon Rating Agency, www.carbonratingsagency.com34 Australian Government, department of the Environment, Water, Heritage and the Arts Revolving Funds, www.environment.gov.au/biodiversity/incentives/revolving-funds.html


21/26

21

Towards Bretton Woods II: the last frontier of Financial Diplomacy

I am convinced that the recent bailout schemes launched by many countries are just ataste of the amount of money that this crisis will eat up. As Bloomberg reported on 24 November: The US government is prepared to providemore than USD 7.76 trillion on behalf of American taxpayers.The pledges,amounting to half of the value of everything produced in the nation last year (US GDP), are intended to rescue the financial system .35

The economy has been badly hit: according to the World Federation of Exchanges (stock exchanges) the total amount of the domestic market capitalizations (the share pricetimes the number of the shares issued) in October 2008 went down to USD 33.6 trillion. As at December 2007 it was over 61 trillion of USD 36 .

I believe that we are not even half the way through and that the next excellent crashes will be in the corporate sector (not only carmakers are in distress) after disclosing theirfinancial results 2008 at the beginning of next year.

In the aftermath of the crisis large multinational corporations have been financingstrategic suppliers by shortening the terms of payments. The fact that commercialaspects prevail on credit risk management will increase risk and dry up liquidity fromthe core business.Most likely the public sector will be hit in a further stage and I seriously wonder if there will be enough taxpayer-money left by then for further rescue plans.Last but not least: the huge amount of liquidity provided by the various bail out schemes will produce soon or later inflation.

Top bankers around the world have happily filled over many years their balance sheets with business worth trillions of USD, notwithstanding their compliance with:

The International Financial Accounting Standards, including the extensively detailed accounting treatment of securities off and on balance sheet and of embedded derivatives.

The Sarbanes-Oxley Act: a tight regulation established with help of the SEC,the US Securities Exchange Commission, in 2002 for companies floated in theUS further to the Enron criminal case and as a protection to investors in capitalmarkets.

The Basel II Accord that regulates how much capital the banking system worldwide shall allocate according to which risks. The Basel II Accord alsointroduces the concept of the Internal Rating Based Approach that allowslarger banks to use their own internal rating system to assess risks instead of using the Standardised Approach. The introduction of the IRB Approach wasmeant to promote merger activities across the entire banking system.

In this scenario it is, indeed, imperative that we re-design the governance structure of the monetary system, together with the financial and economic systems. I suspect,though, that the relevant regulations also need to be extensively reviewed and do not

35 www.bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home36 www.world-exchanges.org Focus n. 189 November 08 published by The World Federation of Exchanges


22/26

22

have much hope that corporate and public regulations are better off. I would humbly suggest that the distinguished members of the UN Global Financial Task Force apply theKISS rule (Keep it Simple, Stupid!) 37 by writing a clear set of regulations and makinggovernance as transparent and equitable as possible.

How good or bad the economy and how sustainable our way of living is going to be inthe near future will largely depend on the following major issues:

The setting of the possible scenarios for the next decadesThe true value of money - the exchange value versus the value of utilization (la valeur dchange versus la valeur dusage)The pricing of commodities and the USD as the global exchange currency The role of diplomacy

The setting of the possible scenarios for the next decades:Looking at the current trends I would set as a possible scenario the Fortress World of the Global Scenario Group 38 and would add the variable of regional perspectives.

According to Yoichi Funabashi: In 2006 intraregional trade made up 58 percent of total trade in Asia, compared with 42 percent for NAFTA and 65 percent for the European Union. China has used the gravitational pull of its economic might tostrengthen regional economic integration. It is now the largest trading partner of Australia, Japan, and South Korea and the second-largest trading partner of India. And in 2007, for the first time since ASEAN was established, China's total trade withthe ASEAN countries exceeded that of the United States' trade with them .39 China and India might decide after all - that international demand from the UnitedStates and Europe has become too weak and volatile for them. As a result, they mightmainly focus on domestic and regional consumption and play the card of commercialintegration in Asia; in particular China - as the world trade catalyst - could easily promote a major shift of flows towards intraregional trade.

The true value of money - the exchange value versus the utilization value:Mr Franois Houtart, a distinguished member of the UN Global Financial Task Force,introduced in his presentation of 30 October 2008 to the panel the concept of theutilization value. According to this concept: the production of value added must not prevail over thoseactivities that ensure the basic needs of the People from a material, cultural andspiritual point of view. When complying with this concept: the fight against the overexploitation of naturalresources would be strengthened and social and environmental externalities would befully taken into account. The set of priorities that we use in managing the production of goods and services would completely change. 40 I truly believe that this is an enlightening concept because the exchange value of commodities has lost the ability to express the value of the benefits deriving from theirutilization.

37The KISS principle is used in business life as an invitation not to further complicate already complex issues

38 Paul Raskin, Tariq Banuri, Gilberto Gallopn, Pablo Gutman, Al Hammond, Robert Kates, Rob Swart GreatTransition- The promise and lure of the times ahead, A report of the Global Scenario Group, 2002, StockholmEnvironmental Institute39 Op. cit. p. 15 of this paper.40

Franois Houtart. Panel sur la crise financiere, United Nations General Assembly, New York, 30 October 2008


23/26

23

The pricing of commodities and the US Dollar as the global exchange currency:I believe that we shall promote the transition from the exchange value towards theutilization value step by step. We cannot discontinue trading commodities with a pricedenominated in USD from one day to the other but we can introduce a mechanismcontributing to set the pricing in non-monetary terms. This would add a variable to thepricing process as a whole making the value of commodities less subject to volatility inthe long term.

In my opinion we could be doing as follows: We shall sponsor medium to long-term bilateral and multilateral swap orcounter-trade agreements between developed and developing countries withtechnology transfer from developed countries swapped with raw materials andproducts from developing countries.

In real terms: according to such agreements EU companies, for example, couldtransfer technology and ensure the environmental sustainability of hundreds of energy plants in South East Asia, for example in China.

In exchange, EU countries could receive raw materials and goods. Prices could be denominated in CO2 units (of lower emission) and not in any currency: this would help changing the pricing process of commodities and make them lesssubject to volatility in the long term.

The entire mechanism could be facilitated and guaranteed by supranationalfinancial institutions with the highest credit rating and / or by Energy SavingClearing Houses that could be set up with this purpose.

The role of diplomacy:In my opinion diplomacy and in particular financial diplomacy shall play a pivotal role

in the next years. For the sake of clarity, I would define financial diplomacy according toNicolas Bayne: Economic diplomacy can be defined as the methods by which Statesconduct their external economic relations. It embraces how they make decisionsdomestically, how they negotiate internationally and how the two processes interact. Financial diplomacy.is a subset of economic diplomacy .41

The complexity of the never ending fine-tuning of words in multilateral agreements isrooted in a great diversity of cultures, religions and languages, in addition of course to technical and political objectives.The global dimension of the ongoing financial crisis and the high degree of interconnectivity of trans-national operations have added complexity and demand thatdiplomacy takes a more global approach.There is a discrepancy today in the fact that diplomacy acts according to nationalmandates while the economic and financial systems function at global level. The debatein the international arena will be intense with financial markets virtually crossingnational borders tick by tick.

41 Nicolas Bayne. Financial Diplomacy and the credit crunch: the rise of Central Banks ;Journal of International Affairs, 1 October 08, www.allbusiness.com/trade-development/international-trade


24/26

24

Alliances have been strengthening so far the wide regionalisation of the world economy but may reduce flexibility if the world is really heading to the Fortress Worldscenario. 42

The shift of power from self-governing markets to State-owned (and Sovereign WealthFund-owned) markets opens the debate on how they should manage their assets inglobal banking operations.How are the new strategic areas to be defined? How shall the State as (foreign)shareholder consider shareholders value? How ethical shall business be?In other words: what is the value proposition of global banking operations in their new State-owned context.

Financial diplomacy should learn as soon as possible how to consistently deal witheconomic interests in the capacity of service for the community, the environment andthe coming generations; infrastructure and social spending in developing countries,together with strong education and capacity building policies must be given the highestpriority by the international agenda.I am convinced that financial diplomacy would also largely benefit from a new trans-

disciplinary dialogue with Ethics and Business with a special focus on trust, confidenceand reputational risk.

Diplomacy may be evolving soon within a matrix of national, regional and trans-national mandates with cross-reporting lines to the national structures and - as anexample - to institutions like the UN and the EU. The next step would be its dynamicintegration in a new global governance model. We must succeed in tackling this complex challenge and need a more holistic approachto get the new governance structure of the financial and economic systems right because we cannot afford any longer the level of snobbish inequity that we have beenexperiencing within the first Bretton Woods framework.For sure: we do not need any Dolly sheep clone as Bretton Woods II.

CONCLUSIONS

Ethics and Sustainable Development: conflict of interests or success story?

Further to the 9,200 words of this paper I dare say that Ethics is not enough to establishand preserve Sustainable Development. We also need Justice.

The economic hyper-dimension that has been given to Sustainable Development cannot be balanced by Ethics only. Economic interests can be easily dressed up as security issues and legitimate the absence of Ethics.In other words, the conflict of interests between Ethics and Sustainable Developmentcould be the success story ever!

The citizens as such and as consumers need to get fully aware of their great power. They have the ultimate power to demand the highest ethical standards from policy makers

42 Op. cit. p. 22 of this paper.


25/26

25

and corporate executives, as well as the right to demand comprehensive and transparentinformation.Internet is a borderless source of information and knowledge under the assumptionthat information is not distorted. The younger generations shall establish andcontinuously improve their own grid of criteria in this context.

Religious leaders may also have to re-set their own agenda very soon. They caninfluence the sense of ethics contributing to set the stage for a different scenario ratherthan the merciless and short sighted Fortress World. 43

The fight against crime and organised crime in particular should be strengthened andhigh priority and full transparency should be given to crimes against humanity, theenvironment and future generations. The sense of justice must prevail over the sense of inequality.

I regret saying that after some five hundred years Niccol Machiavelli in The Princestill is perfectly right It is much safer to be feared than to be loved. Men are lesshesitant about injuring someone who makes himself loved than one who makes himself

feared, because love is held together by a chain of obligation that, since men are awretched lot, is broken on every occasion for their own self-interest; but fear issustained by a dread of punishment that will never abandon you . 44

It is time to change: we must act now and put in place the systemic transformationleading to the shift of values that humankind needs to further evolve. And this must be done today rather then tomorrow.

Thank you for reading. Irene Tosti 31 December 2008

43 Op. cit. p. 22 of this paper.44 Op. cit. p. 6 of this paper. Chapter XVII Of cruelty and mercy, and whether it is better to be loved than to be fearedor the contrary, p. 58


26/26

Imagination ismore important

than knowledge Albert Einstein

ethics and sustainable development: conflict of interest or success story? - irene tosti

Documents