The damaging effects of activities such as deforestation, over-fishing and excessive emissions on the environment, have wide-ranging implications not just on the future quality of economic activity, but on the quality of life itself. Progress has been made both in terms of regulations and the increased sensitivity of corporations to their environmental footprint. However, the progress is relatively small and developing economies are particularly vulnerable to being made the choice location for the so-called dirty industries. The pursuit of profit is a powerful motivation for corporate existence and unfortunately, it often leads to short-sighted behaviour. The ongoing Volkswagen scandal is a clear example of this. Again, it reinforces the need for sound government regulation in ensuring that financial decisions taken by corporations are not only good for those corporates but also for society as a whole. Let me now move on to the last part of my speech, which relates to the governance of finance. After all, the availability of finance is a key constraint for economic agents and therefore, a key determinant of economic activity. Governance of finance: anchoring finance in the real economy The need to maintain sound financial governance of financial institutions is best demonstrated through the impact of its absence. The recent crisis is a stark reminder that weak financial governance of financial institutions can result in unsustainable levels of leverage, excessive maturity mismatches and underpricing of risk within the financial system, ultimately leading to widespread wealth destruction and economic dislocation.

In Lehman Brothers, the Chief Risk Officer (CRO) was stripped of her role in risk matters after warning against too much risk in the face of growing pressure to compete against other investment banks. Similarly, repeated warnings raised by the business chief underwriter of Citigroup against large purchases of defective loans did not translate into action; instead, he was downgraded in performance reviews and subsequently demoted. Another major component in the governance of finance is how individual incentives are influenced through compensation. The global financial crisis offers a telling display of how  7  Parliamentary Commission on Banking Standards (2013). Changing Banking for Good: First report of session 2013–14. Vol. II, HL Paper 27-II HC 175-II (London: HMSO), paragraph 553. 8  Guerrera, F. and P. T. Larsen. Gone by the board? Why bank directors did not spot credit risks. Financial Times 25 June 2008. 9  Source: https://www.fca.org.uk/static/documents/consultation-papers/cp14–13.pdf, paragraph 7.6. 10  Financial Crisis Inquiry Commission (2011). The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Washington, D. C.  BIS central bankers’ speeches  7  incentives were misaligned through the widespread adoption of compensation systems that rewarded short-term performance. In the US, loan officers at Washington Mutual were rewarded more for originating higher risk loans, while loan processing personnel were compensated according to the speed and number of loans processed, rather than loan quality.