Finance and CSR or the Quadrature of the Century
In a complex world, the sum of our knowledge is infinitely smaller than the sum of things we ignore. We are therefore not experts in anything, but simply observers and, if possible, actors of change.
What is CSR?
CSR or Corporate Social Responsibility. Impossible to miss it these last 5 years. All the large companies have a dedicated department, either autonomous or linked to the group’s communications.
By social responsibility, we mean social and environmental responsibility. For companies, this responsibility consists of taking into account (on a voluntary basis) the concerns of all ecosystems they impact through their activities.
Let’s simplify. For a company, this means going beyond the perimeter of its social purpose and implementing concrete actions to have a positive impact on the environment and society (community, nation, people, etc.). Laudable intention.
In some ways, this means giving the company a form of consciousness. The consciousness of the non-zero sum player. The one, where his own success is directly linked to the success of the other (the society, the planet). Let’s not question the intention and the energy debauchery of the teams involved. But let’s ask ourselves the valuation of this action and the underlying interests. Particularly in an industry that has never made the common good one of its concerns: the finance industry.
Could CSR be the “community” card for an industry at the top of the asymmetry between impact and social responsibility?
No one will deny it, finance is by far the most important industry of this new millennium ($316.000 billion of financial assets in 2017). Far, very far even from the digital industry with son its market of “only” $4.261 billion. Today, the finance industry would represent 100x the size of the real global economy. This industry is at the root of the subprime crisis, a crisis that we have been going through for almost 12 years. This industry has no borders, nor even nationality. A network of actors, or rather of algorithms that nobody really controls anymore. Your Uber driver will make as reliable a market forecast as the most successful trader or the president of the FED himself. It is involved in all international, political, social, ecological and military crises, since each node of the network defends its interests, its yields and its underlying industries. Whoever holds the debt, holds the property of those who are in debt and the world is in debt. The beginning of this century has seen the emergence of an algorithmic financial industry that impacts the modern world like no other industry. So far everything is fine, so far everything is fine, so far everything is fine …
What about CSR?
Commitments, announcements, and also concrete actions. But mostly words, many words.
Take the CRS commitments of a major bank in the area of responsible finance, for example. A bank with €61.5bn in equity (consolidated total) for a 2018 net income of €7.27 billion. The group advertises on its website its “voluntary commitments” on global warming, “by adopting a climate strategy consistent with the international objective of limiting global warming to 2°C”. Laudable commitment.
In practice, this commitment is not quantified. At least, unable to find the forecasted load that this one would involve for the group. That is to say, the indissociable loss of earnings from a drastic assumption of responsibility with regard to the subjects on which there is a consensus. But the bank is implementing a sectoral policy establishing the standards it wants to apply to “potentially sensitive” sectors (the ones on which there is consensus). The palm oil sector is one of them. In the introduction, the institution recognizes on one hand, to be an active partner of this industry, on the other hand the strategic importance of this one. Then it lists all the major risks of this activity. Based on this observation, the bank made the voluntary choice to “call” and “encourage” its customers to become members of the RSPO (Roundtable on Sustainable Palm Oil). Let the reader be free to try to find in the text a binding way for the client to comply with this commitment. Of course, the bank cannot force him to do so. But… it could also choose to withdraw completely and gradually from this industry. A strong choice that would mean an irreversible loss of earnings. The fair cost of social responsibility.
This is precisely what Oxfam France points out in a damning report of December 04, 2019, accusing French banks of being the source of a colossal carbon footprint. For BNP Paribas, Société Générale, Crédit Agricole and BPCE in particular, no less than 2 billion tons of CO2 emissions in 2018 would be attributed to them.
This is the whole paradox of “CSR” awareness. What practical action can be taken without harming the company’s profit-making purpose? Why should we go further than what the legislation allows in disregard of more growth? How to continue in business while accumulating knowledge about activities that are harmful to society and the environment? All CSR departments must be permanently torn by these contradictions and the conflict between growth and responsibility.
Greenwashing but not too much: Hands off my life insurance
Another example that perfectly illustrates the current limits of CSR is the position of insurers regarding life insurance. France is one of the leaders in the sector. The AXA group, for example ranks 2nd in the world with a 2018 turnover of €150 billion and €1,029 billion in assets. Insurers are at the forefront of the challenges of global warming and all companies around the world agree on the urgent need to act. In any case, the semantics used tend to make one think so.
In France, life insurance (the preferred savings product of the French after the livret A), represented, according to the think tank The Shift Project, €1,700 billion in assets in 2017. That is €1,700 billion in immobilized cash. Life insurance, which in reality is death insurance, is effectively life insurance for insurance companies. An annuity anchored with the insurer, an annuity making its fortune since once taken out, life insurance can in theory only be released upon the death of its subscriber.
In 2018, as part of the PACTE law, an amendment carried by this same think tank, proposed an environmental revolution. Enable the transferability of its life insurance to another financial product integrating ESG-climate criteria without losing the tax precedence of the original contract. In simple terms, this means enabling individuals to move (without any tax advantage loss) their life insurance to a financial product dedicated to the financing of the energy transition. Authorized move only to this kind of product but a free move and therefore open to competition from other insurers. A revolution that would immediately make it possible to unlock between € 25 billion and € 45 billion towards the energy transition. But a revolution that directly affects the annuity of actors in the sector. Result: instant opposition from insurers and rejection of the amendment …
Social responsibility once again comes up against financial imperatives. But how can you blame an industry that was neither designed nor considered to be responsible? The peripheral efforts made provide a goodwill guarantee, are part of an epochal dynamic, a global marketing plan and probably give a hint of meaning to those who work within it. But the asymmetry between impact and taking responsibility is too strong, too immense to be bridged without a major overhaul of business models and without abandoning the myth of growth at all costs.
The emergence of a new thought pattern
So is there a solution? Can we imagine a world where the finance industry bears a responsibility commensurate with its fair economic weight?
This development has become beneficial for the planet, for human society but also for the sustainability of this industry itself. If there is a solution, it can only exist within the equation itself. The only factor that could be sufficiently important to drive this change is the “consumer” factor. The responsible consumer awareness must become the norm for new business models in finance. The pressure of the individual by his financial consumption must impose this paradigm shift.
This can only be done from its base, as the industry is so opaque to the ordinary consumer. Whether one is poor or rich, the source of all economic exchange, the cord that binds every consumer to this industry, is payment. This means changing the rules at the base. Even if it means calling into question the established monopolies. But, a new parameter in equation must be introduced: responsible companies into the very heart of their business models. An essential parameter to offer consumers the alternative that companies in the sector cannot themselves offer without calling into question their business models.
This is for example the DNA carried by NewB and Turbo Cereal neobanks or by the retreeb’s payment fintech. NewB is an ethical and sustainable bank serving a society where human rights and the planet are respected. With funding from the local economy and societal projects as a basic matrix. The same ethical ambitions for Tubor Cereal, with a specific focus on the global agricultural sector in crisis. Regarding payment, retreeb integrates the funding of societal projects at the heart of its business model. By freeing itself from the conventional payment networks (Visa and Mastercard) thanks to the transaction’s tokenization, it takes back full control over the transaction fees (interbank commissions). With that said, retreeb builds its own model where one third of the transaction fees charged to merchants are dedicated to funding social and environmental projects.
Corporate social responsibility must no longer be a peripheral and voluntary commitment. The quintessence of CSR is an ethical conscience built into the business model.
This sets a new standard in finance. A new equation oriented towards the sharing economy. An equation that integrates the economic viability of the company, customer satisfaction and finally a balance between impact and social responsibility. No need to imagine the historical actors in the finance sector undergoing their transformation. It is up to the new entrants to understand and initiate this paradigm shift. So in a century, Forbes Global 100 Financial Companies, will not have any names of institutions that we know today.
By Lepetit Jeremi -Retreeb’s Co-Founder
Translated from French into English by Julie Lenfant