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How to make finance rhyme with ethics

06 Oct 2016

On the occasion of the Finance for Good event organized by the Society & Organizations Center, Olivier Bossard, Executive Director of the MiM’s International Finance specialization and of the MIF, and Arnaud Apffel (H91), Managing Director of Perennium and Professor of Socially Responsible Investment at HEC, have debated about ethics in finance.


  • Has the world of finance really changed since the last financial crisis?

Arnaud Apffel:  To quote John Kenneth Galbraith, « there can be few fields of human endeavor in which history counts for so little as in the world of finance. » There have been a number of major changes in the financial and economic environment, for instance Central Banks taking a prominent role and the ensuing wild monetary experimentations. But when it comes to financial markets, the crisis has not dramatically altered the mindset and behavior of the various players. What has altered the behavior of people, though, is the raising awareness of environmental issues facing our planet, and the search for more sustainability.

Olivier Bossard:  I agree mostly with Arnaud's comments, but I would also add that the policy-makers globally have drastically helped - although sometimes in a forceful way - to improve the ethical behavior in the financial sector. Many behavioral concerns such as the excessive incentives, the overly complexity of financial instruments, or the excessive leverage or undercapitalization have been addressed thanks to stronger rules from the regulatory bodies. The key question is to figure out whether on the longer term mindsets will naturally evolve in line with this new regulatory framework.

  • Are ethics particularly important in finance?

Arnaud Apffel:  Well, ethics are important across all aspects of our life, personal and professional, obviously. But the world of finance has such proportions and such incentives that the answer to your question has to be yes. There are $75 to $100 trillions of financial assets under management worldwide, this figure is very close to the GWP (Global World Product).

Olivier Bossard:  I also believe that banks have now clearly understood that they need to restore trust and confidence. The dominance of the financial sector in the global economy is not what it used to be, and financial institutions do now clearly realize that maintaining high standards of integrity is crucial to preserve their legitimacy of wealth creation.

  • Has the financial industry lost contact with the real economy? If so, how to reconnect the 2?

Arnaud Apffel:  For the most part, the financial industry (and in particular banking) still lives by the mantra summarized by Milton Friedman in 1970: « there is one and only one social responsibility of business: (…) to increase its profits ». By the way, in this same speech Friedman also said that social responsibility was a subversive doctrine in a free society and that businessmen shouldn’t bother about things such as eliminating discrimination or avoiding pollution… Fortunately, for the past 40 years, throughout the industrialized world and in many developing countries, there has been a sharp escalation in the social roles corporations are expected to play. Mentalities have changed. Coming back the financial industry and capital markets, you can find a number of studies over the past years on how to foster a more sustainable approach and conscience: take the Kay review in the UK (2012), for instance. Or the think tanks around the concepts of patient capital and sustainable capitalism. However, most recommendations do not get adequately implemented, because of the impossibility to do so on a planetary scale, and the unwillingness of governments and regulators to be the first movers (risk of losing out to competitor countries).

  • Olivier, as the Executive Director of the MSc Finance, how do you think the professors should teach ethics in your program, apart from the SRI (Sustainable & Responsible Investment) course?

Olivier Bossard:  Of course, building an ethical mindset based on character and values should be one of my main concerns, as Program Director! It seems so simple in principle when you deal with socially intelligent and bright students.
However, I do not think that just proving that ethics are consequential is enough; our mission is to inspire a truly socially responsible mindset. The key challenge is to develop a real critical thinking and self-governance mindset, which will pertain even in the absence of regulations.

Today, 1 out of 10 US$ invested globally follows broad SRI principles, and the story is far from over

Arnaud Apffel:  First, let’s address a frequent misunderstanding: some people still think SRI is about excluding a few sectors from a portfolio, such as tobacco or alcohol, based on ethical considerations, and leaving some money on the table in the process. That was 30 years ago… at least!
The course is about Investing, but a different, or dare I say more advanced, way of investing.
Today, 1 out of 10 US$ invested globally follows broad SRI principles, and the story is far from over. People come to SRI because they seek higher risk-adjusted returns (most of the time, through risk reductions, but not only), because they want to change the world (think Impact Investing), because they simply want their investments to reflect their own values…

  • So finance can contribute to a better world, then?

Arnaud Apffel:  Most people wouldn’t naturally think so, these days! But this is exactly we want to demonstrate. Maximizing long-term economic value creation, addressing real needs, while considering all costs (including negative externalities) and stakeholders, all this if done right can both make the portfolio we manage more resilient and the world we live in more sustainable.

Olivier Bossard:  By considering remuneration incentives from a different perspective, banks are also developing a business model that integrates truly social responsibility along with capitalism objectives. The development of micro-lending is another area where finance is contributing not just towards long-term prosperity of impoverished borrowers, but also on the short term by expanding labor options, boosting business opportunities and helping under-served communities.

  • Can social business and solidarity economy have an interest for investors?

Olivier Bossard:  More and more, aligning money with values becomes a genuine goal for investors. Impact investing is also a natural response to the lack of financing for social enterprises, and this relative lack of liquidity often generates higher yields for impact funding.

Arnaud Apffel:  The difficulty with social businesses lies in their nature. Most investors will be reluctant if they do not get an adequate return for their risk. Most philanthropists won’t have the skills and/or the willingness to assess the business models. This is still a fairly new field, more developments and proofs of concept/scaling are required, for which the public, para-public and nonprofit organizations are more natural partners than institutional investors with fiduciary duties. The impact investing field that Olivier just mentioned, however, is making headway across the world. Its target is both to generate an adequate financial return and an intentional positive social or environmental impact. Combining these two objectives is key for mainstreaming.