Finance should be a tool at the service of the economy. It should be the ‘money market’ where supply and demand for money meet. A significant portion of the financial system however has transformed from being a tool, to being an end in itself: to make money from money in the shortest possible time, losing sight of its social purpose.
Not only does finance today exacerbate instability and continues to give rise to new crises; not only does it constantly require public capital to save it from collapsing – think of bailout plans – but also, and this is the biggest paradox, it is not even able to do what it should do.
On the one hand this makes it possible for us to bet on the prices of raw materials and foodstuffs; on the other, millions of farmers are excluded from access to credit.
On the one hand, states and central banks continue to provide banks and finance with liquidity; on the other, investments that would be both essential and urgent struggle to find the required capitals. This failure appears all the more evident when we think of environmental issues and climate change.
Investment is needed for an ecological reconversion of the economy, for sustainable mobility, for energy efficiency, for research and training.
The return on such investment however would be measured over several years, and this requires ‘patient capital’. Who might be able to provide this? It is hard to imagine that public finance is the answer, if austerity and cuts are the only imposed way.
It is also hard to imagine that private finance is the answer – it reasons in terms of milliseconds and has proven itself absolutely incapable of operating in the general interest.
Enormous funds are destined to fossil fuels, the extraction and mining industry, intensive agriculture, great dams and other big projects that have an extremely negative impact on the environment.
If anything, these are even more damaging than the general approach and the economic model. The so-called ‘financialisation’ of the economy encourages the continuous pursuit of maximum profit in the shortest possible time in every field, bending the rules and timeframes of economics.
If the only aim of a businesses becomes that of maximising share value in the very short term, there is no space for environmental considerations – these become ‘externalities’.
But there is more. An increasing number of scientists insist upon the fact that it is necessary to keep a good part of the fossil fuels reserves that have already been discovered under ground. We simply cannot afford to combust all existing gas, oil, and coal.
Between 60 and 80 % of the known and – in theory – available reserves must not to be burned if we want to have a chance of maintaining global warming below the threshold of 2° C.
There is however a problem: finance. The stock listing of fossil fuel companies is linked to the level of their supplies: the company signals to the market that it controls a certain number of oil barrels, and thus that will be able to guarantee extraction and commercialisation for a given amount of time. Should such supplies not be extracted and left inside the ground, the company’s stock listing would risk collapse.
The technical term for this is stranded assets, meaning assets that cannot be recovered. The effects would then trickle down to affect pension funds, investment funds and other money savers who have invested in these companies.
Potential losses are estimated in the region of 20,000 billion dollars: an amount equal to the capitalisation of the biggest stock exchange in the world – the New York Stock Exchange. The climate match that is being played out, in the silence of the media, is of the same dimensions as Wall Street.
Not by chance, some of the biggest oil companies on the planet have made a proposal for their own ‘solution’ in view of the Paris COP21: the introduction of a system for pricing carbon.
According to this, a given quantity of emissions would be made to correspond to a given price, constituting an incentive to reduce emissions.
Pushing to its extreme the ideology for which all activity, product or service must be valued only in terms of a price, there will be a supply and demand of CO2, and the invisible hand of the market will take care of the rest.
This marks a shift from the principle according to which those who pollute pay to the principle according to which those who can pay can pollute.
The implication is that political and institutional responsibility and the management of a public good such as the climate will be replaced by – if not sold off to – finance.
This raises the question of whether stock listings are more important than our very existence on planet Earth. The stock exchange or our life.
Yet the road that both public and private finance should follow is the exact opposite. As regards public finance, it is not true that that ‘there are no funds’. According to the International Energy Agency, fossil fuels receive over 500 billion dollars per year in subsidies. And this considers only direct subsidies.
An IMF study that applies less restrictive criteria and includes both indirect subsidies and environmental costs, estimates that fossil fuels present a bill of 5,300 billion dollars per year to public finances.
What might be achieved towards an ecological transition of the economic system were these resources channelled towards energy efficiency, renewable energy and research?
As regards private finance, it is necessary that its timeframes be brought back to those of nature and society. It is necessary that the vast capitals that are deployed today in speculative or damaging activities be rechanneled towards projects that positively impact the environment and climate.
Achieving such a shift however implies working along different directions. The first is the introduction of rules and controls to close down the existing casino.
The measures to be adopted have been known for some time, it is not a matter of technical difficulty but political will: a tax on financial transactions, the separation of commercial banks and investment banks, restrictions to the use of derivative products and much more.
Alongside top-down regulatory interventions, it is perhaps even more important to act bottom-up, with a reflection on the use that is made of our money.
Once this is deposited in a bank or entrusted to an intermediary, does this then go to finance the regional economy and projects that create employment and protect the environment, or does it end up in the cogs of speculation and business with devastating effects?
Money is not neutral, but once it is inserted in financial circuits it contributes to supporting one economic system or another.
We can leave the car at home and only buy local produce in organic food shops, but if our savings are invested in the shares of companies whose value depends on how much coal and oil will be burned in the near future, what is our impact on the climate? And more generally, to what extent do we become the unaware accomplices of this financial system, as well as its victims?
The major financial actors are banks, pension funds and investment funds, and insurance companies. These are fuelled by our money, but we usually know very little or nothing at all about their decisions.
By redirecting our savings we can subtract them from speculative logics and harmful projects, and entrust them instead to those who operate in full transparency, evaluating the non-economic repercussions of economic action and financing projects with positive repercussions on the environment and society.
In Italy, Banca Etica (the Ethical Bank) is the only institution to publish the full list of all loans granted to legal persons on its website.
Alongside the traditional economic evaluation, these loans are also subject to a social and environmental evaluation, in order to verify that those receiving the loan from the bank respect the principles laid out in its Statute.
In Europe and the rest of the world there are several other examples. FEBEA, the European Federation of Ethical and Alternative Banks, brings together 11 banks, six savings and lending cooperatives, five investment companies and three foundations that globally manage over 20 billion euros for over half a million clients.
Albeit with different models and company types, adherents share the same principles in terms of transparency and a concern for the social and environmental dimension. A similar discourse links the 27 financial institutions in Europe, Asia, Africa, Australia, Latin America and North America who together form the Global Alliance for Banking on Values or GABV, a network involving 20 million clients, 100 billion dollars managed and around 30,000 employees.
These numbers are still very small when compared to those of ‘traditional’ finance, but they are rapidly growing all over the world. They show that sustainable banks work better not only from an environmental and social point of view, but also from the economic and financial one.
A GABV study compares the ‘too big to fail’ banks to sustainable banks, revealing how the latter, for the same amount of capital, lend approximately double the amount of the bigger groups for whom purely financial – if not speculative – operations are often preponderant compared with the disbursement of credit to businesses and families.
Between 2009 and 2014, the 25 biggest banking groups in the world provided 931 billion dollars to companies in the fossil fuel industry, compared with only 98 million dollars lent to renewables.
Which one of these systems do we want to fuel with our savings? With ethical finance, a model that is radically different to the dominant one is developing: one that does not consider finance an end in itself, but rather a means.
As such, its starting point consists in evaluating the economic, social, and environmental objectives that it wants to put itself at the service of and that it must contribute to achieving.
This is a concrete alternative for over 500,000 clients in the whole of Europe that proves how finance can and must be a part of the solution and not one of the main problems – if not the main one – as it is today.
Andrea Baranes is President of the Fondazione Culturale Responsabilità Etica of the Banca Etica network. He is spokesman of the coalition Sbilanciamoci! and of the “005” campaign for the introduction of a tax on financial transactions. He collaborates with several specialised magazines as “Valori” and “Altraeconomia” and with the websites sbilanciamoci.info and nonconimieisoldi.org. Among his publications are: Con i nostril soldi (with Leopoldo Nascia, Milano, Ponte alle grazie 2014); Finanza per indignati (Milano, Ponte alle grazie 2012); Dobbiamo restituire fiducia ai mercati: Falso! (Roma-Bari, Editori Laterza 2014); Come depredare il Sud del mondo (Milano, Altraeconomia 20019) and Per qualche dollaro in più. Come la finanza casinò si sta giocando il pianeta (Roma, Datanews 2010).
Article courtesy of Eutopia