Toxic sustainable companies: a critique on the shortcomings of current corporate sustainability ratings and a definition of ‘financial toxicity’

ABSTRACT

Building on critical literature on corporate sustainability, we add a perspective thus far only scarcely addressed: the toxicity of financial practices and products generating systemic risk. We start with illustrative examples setting the stage for defining toxic assets and practices as revealed after the onset of the financial crisis precipitated by the collapse of Lehman Brothers. To illustrate corporate toxicity we use the ‘Global 100 Index’ from ‘Corporate Knights’ to show which (mostly financial) scandals or bailout cases were detected at corporations awarded a position in this prestigious sustainability rating. Next, we present examples of toxic products (Naked Credit Default Swaps and structured products) and practices (securitization and ratings). Based on the examples we derive the concept of ‘financial toxicity’ adopted from pharmacology as a meta-criterion, which, as we argue, should be added to the ESG (environment, society, governance) universe as well as to corporate social responsibility and Corporate Sustainability. We define financial toxicity as ‘the degree to which financial products can systematically harm their buyers and, on a large scale, the extent to which these products or financial practices generate systemic risk’. We discuss implications for theory development and the overall credibility of corporate sustainability ratings.

KEYWORDS:

• Corporate sustainability
• critical studies
• financial crisis
• Naked CDS
• securitization
• rating agencies
• toxic assets
• sustainability ratings

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes on Contributors

Peter Seele is Associate Professor of Coprorate Social Responsibility and Business Ethics at the Università della Svizzera italiana in Lugano, Switzerland, and chairman of EBEN Switzerland, the national chapter of the European Business Ethics Network.

Marc Chesney is Full Professor of Quantitative Finance and Director of the Department of Banking and Finance at the University of Zürich, Switzerland.

Notes

1. Definition of Systemic risk in the financial sector:

Systemic financial risk is the risk that an event will trigger a loss of economic value or confidence in, and attendant increases in uncertainty about, a substantial portion of the financial system that is serious enough to quite probably have significant adverse effects on the real economy. (Group of Ten 2001, 126)

2. An excel file with the complete sources of all activities has been published separately at https://www.researchgate.net/publication/308419183_Dataset_Toxic_Sustainable_Companies_SeeleChesney_2016.