As the financial crisis of 2008 demonstrated, the financial services industry plays an outsized role in the economy as a whole. As a result, we will never transition to a more sustainable economy without a major paradigm shift in the finance industry. We asked four finance experts for their thoughts on the root cause of the problems within the current system and what is most needed to make change for the better.
Q: WHAT IS THE BIGGEST SHORTCOMING OF THE TRADITIONAL FINANCE INDUSTRY FROM A SUSTAINABILITY PERSPECTIVE?
Fran Seegull - Chief Investment Officer & Managing Director, ImpactAssets
Wall Street, management teams, and boards, especially of public companies, are incented to maximize financial returns or shareholder value. The biggest shortcoming of the traditional finance industry is this narrow perspective on value. Value is more broad-ranging and includes economic, social, and environmental factors that currently, and over time, can both create and destroy shareholder value.
Michael Shuman, Author: "The Local Economy Solution: How Innovative, Self-Financing 'Pollinator' Enterprises Can Grow Jobs And Prosperity"
Even though locally owned businesses account for half the US economy and are highly profitable, they receive far less than half of commercial lending and almost no investment from pension, mutual, or insurance funds. Since local ownership is a necessary (if insufficient) condition for sustainability, today’s investment system is completely broken.
Natasha Lamb, Portfolio Manager and Director of Equity Research & Shareholder Engagement, Arjuna Capital
A lack of systems thinking. Investors place capital at risk when they fail to understand that the biological carrying capacity of our world is changing.
Joel Solomon, Chairman and Co-founder, Renewal Funds
“Modern portfolio theory” ignores multiple profound risks. People are beginning to connect their morals with where their money is. Carbon pricing is coming. Environmental standards must strengthen. Misreading the signals of the generational transfer of wealth and power is a potentially disastrous outcome. The current financial system ignores too much about the values, worldviews, and priorities of people, their money, and the unifying necessity for a global soft landing. Tax fairness and good work for all are essential for basic stability. We must redesign and rapidly adopt new principles for legitimate investing. Much of what is currently acceptable and legal is hurting most everything that matters. We can solve these profound global challenges, and the financial system truly holds most of the cards.
Q: WHAT CHANGES NEED TO BE MADE TO ADDRESS THIS SHORTCOMING?
In our world of dwindling natural resources, exploding population, rising economic inequity, and the increasing impact of climate change, Wall Street, businesses, and consumers must broaden their current concept of “value.” All companies create positive and negative social and environmental value. Negatives might include pollution, pesticides used in growing food, and antibiotics in livestock. Positives might result from clean energy being used and generated, educational services for employees and consumers, and diversity in management teams and boards. Factoring these externalities into the value equation would require top-down government policies and standards-setting such as mandated sustainability reporting and a carbon tax or a cap-and-trade system for emissions. But consumers have power, too. By consuming, voting, and investing according to their deeply-held values, they can send a strong message to Washington, Wall Street, and Main Street, igniting systemic change from the bottom up.
Three areas of legal reform are critical:
- First, we must help resuscitate community banks (which naturally lend to local business) by giving them regulatory relief from Dodd-Frank and by breaking up the current oligopoly of megabanks.
- Second, we must overhaul securities reforms to make it easier and cheaper for
local businesses to issue securities and for unaccredited (retail) investors to trade them on local stock exchanges and to pool them into local investment funds. The SEC should give the states broad permission to innovate new kinds of local exchanges and funds.
- Third, states should put in place an income tax credit for all local investment (as several Canadian provinces have done). This will greatly stimulate early-stage local investment.
Investors need to recognize that the next fifty years will not look like the last. Population growth, the burning of fossil fuels, and mismanagement of our natural capital is driving immense physical changes in the form of global warming and resource scarcity. The short-term thinking that created this problem will not solve it. A systemic view of the earth is needed, understanding that the future will not resemble the past, as human activity pushes the limits of the earth’s and atmosphere’s capacity. And while evolving economic and development assumptions are commonplace in traditional finance, investors have not factored future physical scenarios into their decision-making. Investing sustainably is a question of timeline and fiduciary duty. Financial advisors need to take the long view to steward their clients’ capital to avoid investments that have the greatest risk and invest in sustainable solutions. Stepping off the mouse-wheel of quarterly results takes courage, but continuing to invest with the status quo can no longer be considered the gold standard.
The phenomenal privilege of having power and making enormous sums of money must be held with a sense of moral depth, societal responsibility, and commitment for the long-term wellbeing of the whole. We need leaders who drive for carbon pricing, tax fairness for the many, balance sheet accounting for full life-cycle and externalities, along with ultra-high efficient use of natural resources, and ensuring self-respecting work for all. We must embrace, demand, and reprioritize service in, partnership with, and support for government’s role as arbiter for the resource and societal commons. Constant arms races and war cannot be the organizing principles for economic resilience for the long term. The brilliance of human ingenuity in finance must be harnessed to create a multi-generational imperative to balance the needs of a planet that will soon be home to 10 to 15 billion people. The current approach was the winning model for its time and for the then-current level of understanding of ecology and its limits. To continue that now-outdated model is to guarantee chaos and tragic times ahead. I believe that in our hearts, most of us want a more loving legacy. It’s our primary life purpose to leave the very best systems in place to support those eventual generations we can only dream about.