Over the past few years, some of the more important commentators on matters of commerce have been drawn not from the benighted business elite, but rather from the upper echelons of the established Christian churches.
Last year Justin Welby, the Archbishop of Canterbury, published his first full-length book, Dethroning Mammon: Making Money Serve Grace. In the publication, he reflected upon money and materialism, taking the Passion of Christ as its backdrop. This was a thought-provoking book, with its authority arguably enhanced by being authored by an Archbishop who earlier in life had been a treasurer for a global oil company.
This year, the Archbishop’s book on finance has been joined by a paper on the same subject by Pope Francis entitled Oeconomicae et pecuniariae quaestiones (or, in English, “Economic and financial issues”). This also is an interesting read (fortunately, only the title was in Latin!), although not quite as accessible and–for obvious reasons–less informed by any background in business and finance. Like Archbishop Welby’s book, the paper rails against the iniquities of many elements of the global financial system, but is less sympathetic to (or perhaps less informed about) some of the progress made in governance and ethics since the global financial crisis of the late 2000s.
The paper does admit, rather grudgingly, that “global economic well-being appears to have increased in the second half of the twentieth century.” But it also notes rising inequality and unacceptably high levels of poverty. Archbishop Welby had noted this, too, but had acknowledged that–while there are many things wrong with the financial system–it has resulted in hundreds of millions being lifted out of poverty, a transformation in global health and a safer world than in years gone by. But both were in agreement on one point: “Money must serve, not rule.”
A broader duty
Pope Francis says that business has a broader duty than to just shareholders. He uses the now-ubiquitous (and somewhat vague) term “stakeholders” to encompass a broader constituency to which the corporate sector has a duty. Specifically, he lists consumers and communities. It’s a view with which many companies and shareholders (including ourselves) would concur.
The paper also calls for “sustainable policies and perspectives far beyond the short term.” This chimes with the writings of Professor John Kay in his Review of UK equity markets and long-term decision-making. Professor Kay shares the clerics’ anxiety about the scale of financial services in general and that of banking in particular.
Pope Francis says business has a broader duty than just to shareholders.
All three writers consider much of the activity in some areas of the finance industry to be unproductive. Pope Francis’s paper is quite specific in its criticism, focusing on securitization and credit default swaps and on derivatives more generally. He worries about the complexity of many products supplied by the financial services industry–and strongly believes that providers of these complex products cannot hide behind the argument of “caveat emptor” (buyer beware) if problems arise with these products, irrespective of the sophistication of the counterparty.
Pope Francis is also interested in the power of investors and markets to influence the price of money for developing countries, and invites the reader to consider the influence of flows of capital in and out of these economies. But while it is true that these flows influence the price of money, the rates of interest that locals will pay and the value of the currency that they hold, the Pope fails fully to explore why these flows occur. The outflows often are a reflection of poor governance, poor leadership and untrusted central banks.
The pontiff is highly critical of the price of credit, writing: “It is clear that applying excessively high interest rates, really beyond the range of the borrowers of funds, represents a transaction not only ethically illegitimate, but also harmful to the health of the financial system.” This, too, is a complex area, but at least it is one where the churches can be seen to put their money where their mouth is. Examples include the Church of England divesting of their holdings in payday lenders, and the Church of Scotland establishing small credit unions. But at the end of the day, high interest rates also reflect high default rates—which has always been the conundrum. Should poorer people be excluded from sources of credit?
Voting with their wallets
The paper closes with an exhortation to Roman Catholics to “vote with their wallets and to vote daily in the markets in favor of whatever helps the concrete well-being of all of us.” Pope Francis talks of “a responsible exercise of consumption and saving” and to a focus on companies that behave ethically. The increasing centrality of environmental, social and governance processes in mainstream asset strategies (including our own), illustrates how this tenet of church teaching is being followed much more broadly. Perhaps this is because consumers of financial services are indeed “voting with their wallets”—but also, I believe, because more financial services professionals simply think it is the right thing to do.
Oeconomicae et pecuniariae quaestiones is a thought-provoking paper, albeit less penetrable than Justin Welby’s more extensive work. The business background of the latter helps the Archbishop’s work to chime more easily with investment readers. Nevertheless, Pope Francis asks many questions of our profession—many of which we are answering, some of which we are not. But his is a voice that is increasingly listened to by the secular as well as the spiritual world—and one that is increasingly influencing business debate. Even if we disagree with some of his conclusions, we would be well advised to listen.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
Foreign securities are more volatile, harder to price and less liquid than U.S. securities, and are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.