City bonuses, the credit crunch and the pursuit of sustainability

Presented by former investment banker and Season 1 Apprentice contestant, James Max, Monday night’s Dispatches programme (How the banks never lose) made for uncomfortable and disturbing viewing on so many levels.

First, there’s the sheer scale of banks’ irresponsible lending – £362bn lent in mortgages in 2006, over a million of those granted for more than six times the applicant’s income and almost 40,000 at over 10 times…

Then there’s the blatant and scandalous inequity of customers bearing the brunt of the fallout (in reduced savings rates and increased charges), whilst the bankers themselves continue to collect huge bonuses – HSBC’s Group CEO, Michael Geoghegan, reportedly pocketing a £2.14m bonus on top of his £1.07m salary last year, despite presiding over a 28% fall in profits and a write-down of £9.5bn of bad debt…

But perhaps most disturbingly of all, there’s the much broader realisation that the current system appears fundamentally at odds with the pursuit of sustainability.

The major problem is that the bonus culture and the culture of sustainability are diametrically opposed and, at least on the evidence of Max’s investigations, there don’t appear to be any real disincentives to the kind of short-term gambling that the former encourages.

Where’s the incentive to do things differently when massive bonuses are a one-way bet, when industry regulation is to all intents and purposes non-existent (as with Northern Rock), and when – if the shit really does hit the fan – the government is prepared to step in with £50bn of taxpayers’ money because it will do anything to avoid a bank run?

Where’s the incentive to allocate financial capital against any criteria other than the maximisation short-term profit?

As Ray Anderson suggested at Ashridge back in June, I suspect the answer lies with established and emerging champions of CR 2.0 creating sufficient undeniable examples that sustainability actually pays – so that shareholders see unequivocally how companies can create consistently superior value by radically improving their social, ethical and environmental performance.

The process of engaging others has to get people thinking and talking in a completely different language about CR – less about moral imperatives, values and ethics and much more about the financial value to be derived from sustainable strategies.

Paul Gilding (quoted in Jonathon Porritt’s excellent Capitalism as if the World Matters) makes the case much more persuasively than I can, so I’ll leave the final word to him…

Put simply, we believe a focus on value creation drives change more effectively and therefore drives more change. The logic of this has three key elements:

1. If a business focuses on value creation when undertaking action and initiatives in the name of sustainability, it is far more likely to create value.

2. If companies consistently create, measure and report value from sustainability, then financial markets are far more likely to recognise and reward the company.

3. If investor recognition occurs, it will create a positive, self-perpetuating loop encouraging more business action on sustainability, in turn making it more likely that corporate sustainability itself will succeed in the long-term.

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