Reforming and re-wiring finance for sustainability

Finance lies at the heart of the modern capitalist economy – and if you want to make capitalism sustainable, it makes sense to start with capital. For the past 40 years, a host of individuals and institutions have worked to make banking, investment and insurance work for environmental stewardship, social justice and long-term economic development. The motivations of these pioneers have been as diverse as the sustainable development agenda. Some were driven to end financial complicity with human rights abuse, war and violence (apartheid, Vietnam), and others inspired by a desire to make finance available to the unbanked (community investing, microfinance).

Responding to environmental constraints has been another powerful theme (clean tech, carbon markets & disclosure). Alongside these has been a growing sense of a new financial professionalism as seen in the recent ‘shareholder spring’ led by fund managers to hold corporate executives to account.  Indeed, the urgency of the sustainable financial agenda has been underscored by repeated financial crises, most recently the dot.com bubble in the 1990s and the credit crunch that hit the world economy in 2007.

Sustainable finance: two approaches

The blizzard of names given to this movement can often be confusing: ethical, social, responsible (and socially responsible), green and sustainable are all used, often interchangeably. But underlying the terminology lie two intersecting approaches:

  • first, values-driven strategies that place social, ethical and environmental factors at the heart of financial decision-making; and
  • second, value-driven strategies that seek to integrate environmental, social and governance (ESG) elements to the extent they contribute to conventional financial goals (eg boosting returns, reducing risks)

Money: centrally powerful and culturally central

More often than not, real world decisions involve a combination of the two different approaches. For disputes over money have raged ever since its invention – as David Graeber has wonderfully shown in his masterpiece, Debt: the first 3000 years. Money is an extraordinary commodity – with the power to ruin entire economies as well as the capacity to enable better lives and futures. In the West, we often forget that the right use of money – by whom, for whom, at what cost and with what consequences – lies at the heart of the world’s great religions and ethical systems. Forgetting this has been one of the critical blindspots of globalisation.

Sustainable financing: better performance?

Down on the ground, experience shows that those who do recognise the integral importance of sustainability can deliver as good if not better returns than the so-called mainstream (see Deutsche Bank, Sustainable Investing, 2012). This should be no surprise – the global economy of the 21st is being shaped by a new set of human expectations and ecological realities. Alongside this, there are increasing examples of the use of financial innovation to deliver social and environmental progress, whether through micro-finance or carbon markets. None of these have been without problems and setbacks – but for advocates of sustainability, financial markets should be less and less a foreign land and more and more a key arena for change.

Performing well but not yet changing the culture

For all the examples of success, the sustainable and responsible finance & investment (SRI) movement has yet to change the fundamental DNA of finance – the hard-wiring of duties that drive daily behaviour. It is not enough to show that SRI performs – the residual bulk of conventional practice must also abandon unsustainable practices. As history has shown, delivering financial progress is rarely just a question of better standards: institutional reform is also required to deliver a diverse ecosystem of private, public, co-operative, mutual, state-owned and social banks. More profoundly, the insights and imperatives of sustainability need to be placed at the heart of regulation to manage financial markets as a whole, so that long-term resilience becomes a core part of post-crisis plans to minimise systemic risk. This means confronting the market failures that prevent finance from playing its role in sustainable development, most notably short-termism, perverse incentives, and weak accountability.

Growing numbers are taking up the challenge of making finance and investment a positive force for sustainable development (see Generation, Sustainable Capitalism, 2012). With his training in accountancy and his righteous frustration with cant, the financial arena is one place where Richard Sandbrook’s legacy of verve needs to be applied now more than ever.

 

January 2013

About the author

London, UK

Nick Robins joined HSBC in late 2007 to launch and direct its newly-established Climate Change Centre of Excellence, whose aim is to... (Read more)

Nick Robins | Timeline for 'Reforming and re-wiring finance for sustainability'

Related themes