Dr Jem Bendell
Adjunct Associate Professor, Griffith Business School, Australia
Board Member, London Pensions Fund Authority/Senior Associate, Lifeworth
Research Officer, UNI Finance Global Union
Money, money, money. by mid-2008 money was certainly making the world go round, first in a spin, then a downward spiral. The financial system really unravelled in the third quarter of the year. Yet, before the credit crunch became a credit calamity, at the top of the world’s agenda was the huge inflation in the price of food, with some pointing an accusing finger at that soon-to-be-endangered species—the investment banker.
As the world saw a doubling in wheat prices and tripling in rice prices in a year, leading to food riots in over a dozen countries, Olivier De Schutter, the United Nations special rapporteur on the right to food, said that, although climate change played a part, ‘speculation in commodity markets, driven in part by investors seeking havens from slumping stocks has . . . contributed heavily to hunger by pushing food prices out of reach for tens of millions’.1 In the last few years, regulations and advice have been changed to enable large institutional investors to buy into commodities-tracking funds, thus allowing huge sums to pour into this sector and its derivatives, such as options and futures. ‘This has been a serious factor aggravating the crisis,’ Mr De Schutter said, with some retailers and global agribusiness firms benefiting disproportionately from the price hikes.
One implication of this situation for investor responsibility is that investors need to assess more carefully the societal and longer-term economic implications of any regulatory changes they seek. Investors have been incorporating the political affairs of the corporations they invest in as part of their environmental, social and governance (ESG) assessment, but what of the political involvement of the private financial institutions themselves? Might we expect their own political influence to be consistent with the longer-term interests of the people whose money they manage? It is an issue we return to below when considering the influence of financial institutions and their former staff on the regulators.
Although clearly a topic of increasing concern and research, the food crisis had not produced a concerted response by socially responsible investment (SRI) organisations. This disparity is reflected in the varied views collated in June 2008 in an Investment Week survey of UK ethical investment analysts by Sarah Griffiths.2 Gonzalo Baranda of JPMorgan Asset Management said the food crisis was in part driven by long-term trends of ‘an increasing world population and a change in consumption patterns in rapidly growing emerging markets with, for instance, an increase in the consumption of meat’, but that ‘growth in demand for heavily subsidised biofuels’ were an exacerbating factor.
Speaking to Jeffrey MacDonald of the Christian Science Monitor in August 2008,3 Lloyd Kurtz, principal at Nelson Capital Management, a private money-management firm in Palo Alto, California, said, ‘It’s hard to figure out who to blame for the food crisis. Social investment has been most influential when there was an actor that could be identified—e.g., the tobacco companies, the South African apartheid regime, etc. But the causes of the global food crisis are multifaceted . . . That’s probably why you haven’t seen a coherent response from the social-investment community.’
One response came in June 2008 when the Interfaith Center on Corporate Responsibility launched an initiative to tackle food-related issues and propose investing guidelines for its 275 institutional investor members with projects aiming to encourage sustainable agriculture worldwide. Joachim von Braun, director-general of the International Food Policy Research Institute, a food-security think-tank in Washington, DC, also looked at what investors might do to positively help the situation. He advised that ‘The mobilization of capital for agricultural growth, especially in the small-farm economy, definitely cannot come only from the public sector. So the private sector has a very important role to play in order to mitigate and overcome the current food crisis.’ He urged social investors to shun commodity futures trading and instead provide ‘what small-farm agriculture really needs, [which] is long-term investment’. Von Braun added that ‘Ethically motivated investors should stay away from grain and oilseed-based biofuels because these biofuels by now are the cause of about one-third of the overall increase in food prices.’ In select cases, he told the Christian Science Monitor, development of certain biofuels can be justified, but ‘the large-scale investment in Europe and North America has been extremely damaging to world food security’.
The price of many foodstuffs fell back somewhat in the third quarter, but the price inflation forewarned of likely future scenarios, as climate impacts increase, groundwater and soils are depleted, industrial agriculture becomes more expensive due to peaking oil production, and global finance herds from one asset class to another. Socially responsible investors need to consider these root causes. A key factor has been that investment seeks the greatest returns without pricing in externalities such as carbon, or the risk to future generations from a food supply dependent on oil. This gives rise to situations such as in the Philippines, which went from a net exporter to the largest importer of rice in a matter of decades, as investment poured into its business process outsourcing industry, and government and industry turned their backs on domestic agriculture. Supporting the resilience of communities and economies should be a key dimension to responsible investment, with encouragement given to the government facilitation of investment to build such resilience.
Another issue highlighted by food inflation is the bubbling nature of our financial system. Most countries use a debt-money system, where money is created by private banks in the form of loans. Consequently, as Chris Martenson explained on Corporate Watchdog Radio, there is not enough money in the world to pay back all the debt. It leads to a situation where the economy must continually grow at a continuing rate, because of compound interest. This, he argues, leads to inevitable economic bubbles.4 Any form of bubble can cause a problem for asset owners, who lose out far more when the bubble bursts, compared to the financial services professionals, who can make a personal fortune on commissions as the bubble inflates. A bubble affecting the price of goods that are needed by disadvantaged people (think rice rather than shares in ‘buy.com’) presents a double whammy, as many people are hurt as the bubble inflates. If a bubble becomes too large, due to an inability to create units of value out of thin air (think derivatives of mortgage-backed securities) bought by people with access to sufficient credit (think ‘sufficient’ to keep the process going until they get their bonus), then you have the mother of all bubbles, which leads to a financial crisis. As institutional investors such as pension funds invest in the whole economy, they are particularly vulnerable to boom-and-bust cycles, and yet we might expect them particularly able and willing to influence the economy, as part of their duty to their policy holders. Yet, as we will see, this has not happened, and people who have saved for their whole lives are as a consequence hurt by a lack of systemic fiduciary duty shown by those meant to safeguard their future.
(The references are available in the pdf download and hard copy versions of this annual review, available from Lifeworth’s bookstore.)
This section can be referenced as:
Bendell, J., and N. Alam, S. Lin, C. Ng, L. Rimando, C. Veuthey, B. Wettstein (2009) The Eastern Turn in Responsible Enterprise: A Yearly Review of Corporate Responsibility from Lifeworth, Lifeworth: Manila, Philippines. (Page numbers for this section are available in the pdf download and hardcopy.)