Tuesday, May 10, 2016

The Panama Papers Highlight the Need for Sustainability

The release of the Panama Papers touches upon a number of themes that are at the heart of sustainability. Among them are corruption, transparency and environmental and social governance (ESG)issues. These papers also highlight the need to address the growing problems associated with wealth disparity that threaten our economic and social system.

The Panama Papers include a summary of the clients of the Panamanian law firm Mossack Fonseca which has sheltered trillions of dollars of assets. They bring to light some of the obstacles that undermine the realization of the lofty aspirations contained in the Paris Climate Agreement and the UN's Sustainable Development Goals.

Culture of tax evasion

As explained by Thomas Schueneman in a Triple Pundit opinion piece, the Panama Papers are a "stark reminder of the need to redouble our efforts to align our values with our functioning global economy if there is any hope of achieving our higher aspirations."

The leak calls us to challenge the culture that construes hiding assets as an acceptable practice. These "loopholes" must be closed.

"These findings show how deeply ingrained harmful practices and criminality are in the offshore world," said Gabriel Zucman, an economist at the University of California at Berkeley and author of The Hidden Wealth of Nations: The Scourge of Tax Havens.

Lost wealth

According to Bruegel, Zucman's paper claims that 8 percent of the global financial wealth of households is held in tax havens, three-quarters of which goes unreported in official statistics. Approximately 40 percent of the world’s foreign direct investments are routed through tax havens. In the US tax shelters represented a loss of over $100 billion for the treasury in 2013. In Europe that amount is around €50-70 billion a year in lost tax revenues.

These papers reveal the massive amounts of money that are protected from government taxation. This wealth could fund climate action and build a clean energy infrastructure.

As reported by Global Financial Integrity illegal offshore tax havens cost developing countries almost $6 trillion between 2001 and 2010. According to estimates by the Tax Justice Network, there is more than $21 trillion dollars of tax-free assets offshore. Appropriate levels of taxation would add trillions to national coffers.

There are more than 350,000 secretive International Business Companies (IBCs) listed in the Panama Papers. The list of 214,000 offshore accounts and 11.5 million confidential documents contained in the documents suggest that we need to review systems that enables the super-rich to hide their assets. Among those implicated are Russian President Vladimir Putin and Icelandic Prime Minister Sigmundur David Gunnlaugsson.

Legal banking

Although offshore accounts are not illegal, they are commonly used to shield illegal activities. Banks have knowingly contributed to hiding assets and perhaps even facilitated money laundering. The Panama Papers show that Mossack Fonseca worked with more than 14,000 banks.

These tax shelters enable drug cartels, companies and wealthy individuals to avoid corporate taxes, income tax, capital gains tax, local taxes, and estate or inheritance taxes, including gift taxes. 

Even if no laws are broken, the activities revealed in the Panama Papers are morally reprehensible and this represents a significant reputational risk for businesses.

In an article titled, "Panama Papers yet again stress the importance of ESG," Robeco states:

"The relevance for us as investors is that if banks are found to have engaged in illegal tax evasion practices, their reputation will be damaged and they can face big fines. This affects profitability and debt repayment capacity."

Corruption

Corruption is a cancer that eats away at our economies and undermines environmental protections. The impacts of corruption extend far beyond environmental concerns and it even puts the world's economies at risk. Sustainability is a bulwark against the kind of corruption that was revealed in the Panama Papers. It is also the best way to combat the culture of corruption that plagues our economies.

The Panama Papers reveal that Mossack Fonseca is behind one of the largest money laundering operations in the world.  The leak occurs against the backdrop of rampant corruption in the fossil fuel industry. We recently learned that Exxon and other oil companies have financed sophisticated misinformation campaigns.

Corruption is ubiquitous but it is especially taxing on nations that are struggling to develop. According to a new report issued by Transparency International, 92 percent of Lebanese citizens believe that corruption has worsened over the past year. About two-thirds say the public sector is entirely corrupt, and 76 percent insist that the government is doing a terrible job of fighting corruption. Over the past year, 28 percent of Lebanese say they have paid a government official to get something done. One third of the people in the Middle East, or 50 million have paid at least one bribe in the past year and almost half of those who reported corruption say that they endured some form of retaliation.

ESG

Environmental social and governance issues (ESG) are critically important to the health of our economies and our planet. According to interview based research with senior investment professionals, lawyers and policymakers, failing to consider long-term investment value drivers, which include ESG issues, is a failure of fiduciary duty.

Robeco states that tax avoidance and evasion are material ESG factors. They argue we must include these factors in our analysis of equities and credits.

Transparency and reporting 

The best ways to address the issues raised in the Panama Papers is through incorporating sustainability including best practices in reporting and goals for transparency.

Robeco calls for improved transparency, "for example by publishing tax policies and country by country reports, could allow companies to offer investors and other stakeholders a better insight into the risks associated with their tax policies."

Corporations are increasingly engaging transparent reporting practices and this powerful trend is being woven into sustainable systems management curricula.

The combination of investor interest and consumer demand are driving transparency. We are seeing increased transparency in supply chains. We are seeing a host of B Corporations emerging that practice transparency. The data is increasingly showing that transparency is about more than mitigating risk it is also about profitability.

The Panama Papers are not the first such leak, in 2013 there was the Cayman Islands tax leak and there have been others including the HSBC leak. Secrecy is much harder to maintain in the digital era and this should be a warning to the one percent who seek to avoid paying their fair share of taxes.

Ending the kind of tax evasion that is contained in the Panama Papers is an integral part of sustainability and essential to transforming our economic system in ways that serve both the planet and its inhabitants.

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