From sustainable finance to responsible capitalism

2.5 billion additional human beings by 2050: that is 10 billion people to feed with the limited natural resources of planet earth. This fact urgently calls for a modern and thoughtful response.

Sustainable development and sustainable finance are working on this and aim to make our resources more efficient. However, reflection must go a step further to understand how the “wealth of nations” should be distributed among citizens. This is the role of responsible capitalism.

In order to achieve the Paris Agreement, the following four conditions must be met at the very least:

-       To exit coal-fired power generation once and for all.

-       To make gas and oil operators move towards renewable energies, like Orsted which, in ten years, has been able to transform its oil production activity into the production of renewable energies.

-       Systematically integrate ESG into the development strategies of both equity investors and lenders and align their equity and debt portfolios with the 1.5°C temperature trajectory.

-       Accelerate the implementation of new models of the circular economy.

At the same time, in order to unlock the trillions of euros desperately waiting to finance the transition to a low-carbon economy, innovation must be accelerated by applying the ESG filter to all existing financial products such as swaps, options, swaptions, futures and structured products. This development will create the necessary liquidity needed by the various market players such as speculators, hedgers and market makers, and ensure an efficient reallocation of financial flows towards decarbonized assets.

While these actions will contribute to the achievement of the Paris Agreement, they do not affect the sharing of the wealth we create.

There is not a single day in the world without popular demonstrations calling for a legitimate increase in purchasing power.

The spread of globalization has been accompanied by the deepening of economic inequalities. Today, nearly half of the world's wealth is held by 1% of the population and 7 out of 10 people live in a country where inequalities have increased over the last 30 years. The World Economic Forum has identified this imbalance as a major risk to human progress. The massive concentration of economic resources in the hands of fewer people is a real threat to inclusive economic and social systems.

The new Social Impact fund just launched by CPR AM is very interesting in this respect. It invests in international companies that tend to reduce inequalities, assessed through metrics such as the proper functioning of the labour market, the inclusion of women and minorities, tax and social policy, access to health and education, access to basic services and respect for fundamental rights.

If politicians do not act quickly to reduce these inequalities, it will not be surprising to see increased animosity between citizens. This could lead to more wars, increasing geopolitical turmoil and major global disorders which would, in turn, accentuate these very same inequalities while the role of governments is to secure and protect.

We often hear that communism did not work. But, honestly, can we reasonably say that liberal capitalism works well?

We also often hear that liberal capitalism is the least bad system. In this case, what should we say about the cooperative system, of which examples such as Dekra or John Lewis are clear successes?

It is now the right time to rethink our economic model built on certainties and paradigms of the past. An alternative solution, that would be halfway between communism and liberal capitalism, or completely innovative, should allow for a fairer and more equitable sharing of the wealth created.

I believe that this challenge deserves the special attention of the Nobel Prize winners in economics still in activity. They could gather under the sponsorship of France or the United Nations under a mission to propose a new model adapted to the current realities.

In the meantime, major adjustments aimed at restoring certain economic truths can already be implemented.

Inflation: the great illusion

We are often told there is no inflation today. In this case, how can we explain that 65% of households in OECD countries have seen their real income (both labour and capital) stagnate or fall between 2005 and 2014, as shown by McKinsey's excellent study Poorer than their parents? Flat or falling incomes in advanced economies from 2016? This generation would be the first to be poorer than the previous.

The truth is that the calculation of inflation (called HICP in Europe, Harmonised Index of Consumer Prices) is archaic. It includes new technologies such mobile phones and other Internet packages which have a downward impact on the prices of goods and services, but it does not include the cost of rents, a key factor. According to the barometer SeLoger, rents increased by 2.5% in France and 4.9% in Paris in 2019, and by more in some European capitals. To reflect the reality of the cost of living, the method of calculating inflation must evolve and be harmonized at the international level to allow real comparisons between countries.

We live in a world with inflation. It is even estimated by some economists to be 3% to 5% in developed countries. Many economic decisions are therefore based on the wrong information. Stock prices are a perfect illustration of this: if future corporate profits were discounted by taking into account an inflation rate of 4% instead of 1%, stock prices would be about 20% lower.

In fact, everything happens as if we have a deliberately overvalued market to serve stock market performance. This inflation bubble, one among others, will burst the day inflation is calculated correctly.

GDP: the mantra

The Gross Domestic Product called GDP is the main indicator to assess economic growth. It is supposed to evaluate the total output a nation produces in a year. So the more a nation produces goods and services, the higher the GDP and the better the economic outlook. This leads to some inspiring paradoxes. For example, the more a country produces pills and medicine - indicating that society is sick the higher its GDP and the better the economic growth.

Growth is also often made at the expense of externalities such as the degradation of soil, pollution of water and other environmental damages, whose impacts are detrimental to society and difficult to evaluate.

GDP could embed qualitative elements such as the triple H: Happiness, Harmony and Health.

Since the 1970s, Bhutan has used the concept of Gross National Happiness (GNH) as an alternative to GDP. Rather than focusing strictly on quantitative economic measures, GNH considered good governance, sustainable development, the preservation and promotion of culture, and environmental conservation as the four pillars when deciding to pass laws.

It’s time that we changed the way GDP is calculated around the world by taking into account these externalities and qualitative elements.

Wages and bonuses: the Carlos effect

The law should allow for a maximum gap between the lowest salaries and that of the CEO. Very often, when CEOs are dismissed, their departure is rewarded by an additional remuneration. This "golden parachute" ejection bonus should already be integrated into their astronomical salary.

Bonuses paid to investors and traders should reward their financial performance over the long term in order to avoid short-term speculative decisions. Traders earn significant sums when they make profits but are not penalized when they accrue losses. However, when banks suffer bankruptcy it is with the money of citizens that they are rescued. This is cynical.

It is certainly not this short-termism that will allow companies to take strategic actions to create long term value that would allow them to align with the Paris Agreement and the SDGs.

Stocks: Wall Street

It would also be a good idea to enshrine into law an employee shareholding target of 20%, for example, following what Bouygues Group did in France, where employees hold 22% of the company's capital. This idea dear to General de Gaulle should, in theory, motivate employees and build loyalty.

Trusts and tax havens: love thy neighbour...

An ingenious English invention from the Middle Age, the trust is a written document whose amounts escape any publication of accounts. Being registered often in the Commonwealth tax havens, trusts are tax-exempt. A trust therefore allows anyone to evaporate wealth. In 2015, Gabriel Zucman from the University of Berkeley estimated the sums placed in tax havens at some 8 trillion euros, i.e. nearly 11.6% of the world's GDP at that time. Given the lack of transparency of these figures, we can reasonably assume that they are in fact much higher. All these sums would, if they were declared, make it possible to significantly reduce public deficits around the world.

It is therefore necessary not only to oblige trusts to produce audited annual accounts, but also to proceed with international tax harmonisation in order to combat this indecent evasion.

Not surprisingly, it is the richest who are escaping to make even more money when they need it marginally the least. Liberal capitalism is selfish and does not dare to share.

Money creation: don't touch the loot

In absolute terms, the reserve requirement ratio should increase in order to limit the exponential effect of money supply and to avoid any disconnection with the real economy.

By creating money, central banks influence the financing of the economy. The "Green supporting factor" could favour loans to finance the transition by requiring less in reserve requirements from the banks that grant them, while the "Brown penalising factor" would have the opposite effect for the financing of high-carbon activities. The problem faced by central banks is that we don’t have yet reliable data on the bankruptcy rate of "green" companies compared to high-carbon emitting companies. Is it higher? Is it lower?

Tobin tax: Robin Hood

Originally intended to limit exchange rate volatility, the Tobin tax would consist of paying a tiny tax on international financial flows, which would help reduce, in particular, inequalities between North and South. In 2012, France introduced a Financial Transaction Tax (FTT), which today stands at 0.3% on share purchases. 1.6 billion euros was raised by the Treasury in 2018. If this tax were generalized to all financial instruments worldwide, one can imagine the funds that could be raised.

In the books: new environmental accounting

Most of the information found in balance sheets and profit and loss accounts are linked to a financial value that can be amortized or provisioned. Today, liabilities only reflect the financial capital of a company, which represents the amount of money that the shareholders put at its disposal in order to make a profit.

It would be beneficial to also consider human and natural capital in the liabilities of a company. The environmental accounting has the objective to safeguard these two capitals. The company exists and uses an ecosystem to create value. However, this ecosystem must not be degraded, whatever use the company makes of it. The same applies to human capital. The company must respect the physical and mental integrity of its collaborators.

There is an interesting pilot phase being made in France using the CARE methodology. The first results are expected in Q2 2020.

My aim is not to question the very notion of private property, nor the freedom of enterprise, which are fundamental to create wealth, but to make capitalism more responsible by controlling it when it is too liberal and thus avoid its systemic crises that only benefit the few.

The global coronavirus crisis is a painful reminder of the limits of excessive globalisation and will, I believe, lead to profound structural changes in supply chains and in our working methods.

In my view, politicians who have the courage to transform liberal capitalism by integrating more consciousness, ethics and sharing values will undoubtedly mark the history of our 21st century.