Corporate Social Responsibility

Meltdown: not just a metaphor by Joseph Stiglitz (Guardian UK)

Posted on 8 avril 2011. Filed under: énergie, Corporate Social Responsibility |


 

    Fukushima nuclear plant, Japan 

    The damaged Fukushima nuclear plant,  Photograph: Reuters
    Vested interests cause both our financial system and the nuclear industry to compulsively underestimate risk

The consequences of the Japanese earthquake – especially the ongoing crisis at the Fukushima nuclear power plant – resonate grimly for observers of the American financial crash that precipitated the Great Recession. Both events provide stark lessons about risks, and about how badly markets and societies can manage them.

Of course, in one sense, there is no comparison between the tragedy of the earthquake – which has left more than 25,000 people dead or missing – and the financial crisis, to which no such acute physical suffering can be attributed. But when it comes to the nuclear meltdown at Fukushima, there is a common theme in the two events.

Experts in both the nuclear and finance industries assured us that new technology had all but eliminated the risk of catastrophe. Events proved them wrong: not only did the risks exist, but their consequences were so enormous that they easily erased all the supposed benefits of the systems that industry leaders promoted.

Before the Great Recession, America’s economic gurus – from the head of the Federal Reserve to the titans of finance – boasted that we had learned to master risk. « Innovative » financial instruments such as derivatives and credit default swaps enabled the distribution of risk throughout the economy. We now know that they deluded not only the rest of society, but even themselves.

These wizards of finance, it turned out, didn’t understand the intricacies of risk, let alone the dangers posed by « fat-tail distributions » – a statistical term for rare events with huge consequences, sometimes called « black swans ». Events that were supposed to happen once in a century – or even once in the lifetime of the universe – seemed to happen every 10 years. Worse, not only was the frequency of these events vastly underestimated; so was the astronomical damage they would cause – something like the meltdowns that keep dogging the nuclear industry.

Research in economics and psychology helps us understand why we do such a bad job in managing these risks. We have little empirical basis for judging rare events, so it is difficult to arrive at good estimates. In such circumstances, more than wishful thinking can come into play: we might have few incentives to think hard at all. On the contrary, when others bear the costs of mistakes, the incentives favour self-delusion. A system that socialises losses and privatises gains is doomed to mismanage risk.

Indeed, the entire financial sector was rife with agency problems and externalities. Ratings agencies had incentives to give good ratings to the high-risk securities produced by the investment banks that were paying them. Mortgage originators bore no consequences for their irresponsibility, and even those who engaged in predatory lending or created and marketed securities that were designed to lose did so in ways that insulated them from civil and criminal prosecution.

This brings us to the next question: are there other « black swan » events waiting to happen? Unfortunately, some of the really big risks that we face today are most likely not even rare events. The good news is that such risks can be controlled at little or no cost. The bad news is that doing so faces strong political opposition – for there are people who profit from the status quo.

We have seen two of the big risks in recent years, but have done little to bring them under control. By some accounts, how the last crisis was managed may have increased the risk of a future financial meltdown.

Too-big-to-fail banks, and the markets in which they participate, now know that they can expect to be bailed out if they get into trouble. As a result of this moral hazard, these banks can borrow on favourable terms, giving them a competitive advantage based not on superior performance, but on political strength. While some of the excesses in risk-taking have been curbed, predatory lending and unregulated trading in obscure, over-the-counter derivatives continue. Incentive structures that encourage excess risk-taking remain virtually unchanged.

So, too, while Germany has shut down its older nuclear reactors, in the US and elsewhere, even plants that have the same flawed design as Fukushima continue to operate. The nuclear industry’s very existence is dependent on hidden public subsidies – costs borne by society in the event of nuclear disaster, as well as the costs of the still-unmanaged disposal of nuclear waste. So much for unfettered capitalism!

For the planet, there is one more risk, which, like the other two, is almost a certainty: global warming and climate change. If there were other planets to which we could move at low cost in the event of the almost certain outcome predicted by scientists, one could argue that this is a risk worth taking. But there aren’t, so it isn’t.

The costs of reducing emissions pale in comparison to the possible risks the world faces. And that is true even if we rule out the nuclear option (the costs of which were always underestimated). To be sure, coal and oil companies would suffer, and big polluting countries – like the US – would obviously pay a higher price than those with a less profligate lifestyle.

In the end, those gambling in Las Vegas lose more than they gain. As a society, we are gambling – with our big banks, with our nuclear power facilities, with our planet. As in Las Vegas, the lucky few – the bankers that put our economy at risk and the owners of energy companies that put our planet at risk – may walk off with a mint. But on average and almost certainly, we as a society, like all gamblers, will lose.

That, unfortunately, is a lesson of Japan‘s disaster that we continue to ignore at our peril.

© Project Syndicate 2011

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Is Happiness Sustainable? by RP.Siegel (TriplePundit)

Posted on 7 janvier 2011. Filed under: Corporate Social Responsibility |

 

There’s been a lot of talk about happiness as a kind of sub-theme of the sustainability movement. At first it seems like a somewhat odd juxtaposition, until you consider the way that our consumer societies have been plundering the planet in search of that elusive state of mind.

It’s a bit reminiscent of that old Waylon Jennings song, “Looking for Love in All the Wrong Places.”

The first time I heard about “Gross National Happiness” was from Frank Dixon at a SOL Sustainability Consortium Conference about six years ago. Frank is the founder of Global Systems Change and the former Managing Director of Research for Innovest Strategic Value Advisors, which is the largest corporate sustainability research company in the world. Frank was talking about the Gross National Happiness indicator that had been instituted in the Kingdom of Bhutan.

The thing that impressed me so much about Frank when we first met was the way that he was able to break down so clearly the various ways that our  flawed economic system incentivizes unsustainable behavior, by focusing on the means rather than the ends. Things like the failure to incorporate externalities into prices (which ends up passing them along to angry taxpayers who don’t see the connection), the failure to consider limits to growth, and the under-valuing of future generations due to the time-value-of-money principles that all bankers use to their advantage, have all conspired to bring us to the brink of destruction, while top managers, who have been misleading the public for decades, grow rich beyond comprehension.

What gets measured gets managed, and good managers know how to achieve results. But if we are measuring the wrong thing, then the best we can hope for is to make great strides in the wrong direction, which is exactly what we have done.

Take the GDP (Gross Domestic Product) for example. This is the primary metric that economists use to measure the “achievement” of our economy. It therefore, supposedly represents our quality of life. But if the GDP grows, does that mean that our economy achieved what it was intended to in terms of life, liberty and the pursuit of happiness?

According to a 2007 paper by economists Piketty and Saez during the period from 1973-2005, the US GDP, adjusted for inflation grew by 160%. That’s a good thing, right?

Certainly it was good for those at the top of the heap. Those folks in the top 10% saw a 66% increase in their net worth, while the top 1% got richer by 168% and the top 0.1% saw their nest eggs grow by 387%. But for the rest of us, meaning the bottom 90%, which means you and me and everyone we know (if you still work for a living); we saw our net worth decrease by an average of 3% over those 32 years. But the economists call this time frame a period of vigorous economic expansion, despite the fact that many other quality of life metrics, like literacy, obesity, infant mortality, childhood poverty, homelessness, etc., all went the wrong way.

“Measuring GDP alone,” Frank told me on the phone, when I caught up with him “is like publishing an income statement, without a balance sheet. It does not include the intangibles or the external costs.”

A briefing on the subject of happiness indicators, sponsored by the Brookings Institution back in 2004, cited Robert Kennedy, who, referring to the GDP said, “It measures everything…, except that which makes life worthwhile.”

The story of how the King of Bhutan has made Gross National Happiness, the primary economic indicator for his country has been widely discussed. I have a paper here on the topic by Frank Dixon, dated February 2004 that he presented on a conference on the topic in country. The leadership of that tiny, primarily Buddhist country, adapted this metric as a way to ensure that as they began to modernize, they did not lose their unique culture, their country’s breathtaking natural beauty and their deeply spiritual outlook on life. It was adapted to help guide them in avoiding decisions based on short-term gain without consideration of the larger spatial and temporal context.

“In perhaps the most important areas, Bhutan appears to be ahead of many Western nations. The country is one of the few regions where humans live at or near a sustainable level. In addition, the country seems to have higher levels of happiness as measured by family stability, lack of violence and other metrics. However, life is hard for many Bhutanese. Western technology, products and know-how could help improve living conditions and better meet basic needs in many cases. The difficult part will be gaining these benefits while avoiding the environmental and social degradations that nearly always accompany Western-style development.”

Frank is currently working on an ambitious new book, as yet untitled, that will explore the issue of how to achieve sustainable prosperity, starting with the big picture: understanding how all the issues of the day are linked together through our economic system, and then recognizing how that system is and has been flawed going back to before the end of George Washington’s presidency. The book will also describe what we need to do to get it onto a truly sustainable track.

I hope to have the opportunity to preview some of the major ideas in the book, in this space, over the next few months, through further conversations with Frank. Keep checking back here for some very exciting ideas.

***

RP Siegel is the co-author of the 2009 sustainability thriller Vapor Trails, about an oil company and a spill they wish never happened.

 

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