14578 FFF Annual report V4 15/6/09 11:55 Page 1
rethinking capital: the larger lessons of the financial crisis
june 2009 14578 FFF Annual report V4 15/6/09 11:55 Page 2
Forum for the Future - the not-for-profit sustainable development organisation - works in partnership with more than 120 leading businesses and public sector bodies, helping them devise more sustainable strategies and deliver these in 1 the form of new products and services. Our vision is of business and communities thriving in a future 2 that is environmentally sustainable and socially just. We believe that a sustainable future can be achieved, that it is the only way business and communities will prosper, but that we 3 need bold action now to make it happen. We play our part by 3.1 inspiring and challenging organisations with positive visions of a sustainable future; finding innovative, practical ways to help 3.2 realise those visions; enabling leaders to bring about change; 3.3 and sharing success through our communications. 3.4 3.5
www.forumforthefuture.org
Author: Alice Chapple Registered charity number: 1040519 Company limited by guarantee: 2959712 Registered office: Overseas House, 19-23 Ironmonger Row, London, EC1V 3QN Enquiries: 020 7324 3630 or [email protected]
Publication of this report has been supported by The Co-operative Group. 14578 FFF Annual report V4 17/6/09 10:08 Page 3 contents
executive summary 3
1 introduction 5
2 diagnosing the problem: why capital markets fail 6
3 finding solutions: where to focus attention 10 3.1 rethinking risk assessment and asset valuation techniques 10 3.2 recapitalising – and not just the banks 14 3.3 stimulating investment in low-carbon, resource-efficient assets 17 3.4 re-regulating capital markets 22 3.5 new models of sustainable growth 27
conclusion 30 14578 FFF Annual report V4 15/6/09 11:55 Page 4
executive summary
introduction To encourage this dialogue and help create a momentum for change, Forum for the Future will be convening some round This paper is about why capital markets fail, and what might table discussions to refine some of the broad help us emerge from the current financial crisis with more recommendations outlined in this paper. In each of the five resilient, equitable and sustainable systems. Developing some areas we have identified as requiring attention, this paper key themes from Jonathon Porritt’s pamphlet Living within our suggests the people and organisations that could usefully Means (March 2009), it highlights five areas that require collaborate in refining the recommendations. particular attention: diagnosing the problem: why capital 1 rethinking risk assessment and asset valuation techniques markets fail Capital markets fail for a number of interlinked reasons, 2 recapitalising – not just the banks, but social and including: natural capital too • incentives are not aligned with the public good 3 stimulating investment in low-carbon, resource- efficient assets • critical goods and services are not valued or are under-valued 4 re-regulating capital markets – including remuneration • we lack imagination and awareness about new 5 exploring sustainable growth. and systemic risks
In each of these areas, it highlights important initiatives and • regulation is inadequate identifies what we need to explore. There is an enormous amount of great work being done, but at present this is not • ‘progress’ is based on unsustainable growth sufficiently joined-up. The public sector, the private sector models fuelled by credit. and the NGO and academic communities can bring their different perspectives to bear on finding solutions. This paper aims to provide a platform for dialogue between them.
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finding solutions: where to and private investors to deliver funding aligned with the focus attention public good. We need to explore: ways to engage 4. re-regulating capital markets – including the private sector in the recapitalisation programme; remuneration new financial mechanisms to facilitate partnerships Existing incentive structures promote a preoccupation with between the public and private sectors; and the 1. rethinking risk assessment and asset valuation short-term returns. This results in a mismatch between the potential for such partnerships to deliver funding on techniques interests served by the capital markets and the interests of a sufficient scale. The failure of risk assessment has been an obvious feature society as a whole. Firmer regulation can better align the two, ensuring that systemic risk is accounted for and of the financial crisis. We can learn from this to create a And we need to look at how to demonstrate that managed, and that incentives both for money managers system that is much more effective in managing risks – and up-front investment has benefits that substantially outweigh and for investors are based on longer-term perspectives. has a very different approach to valuing capital, including the costs over the medium-term. social capital, ecosystems and biodiversity. Key elements This, in turn, will lead to improved methods of risk of this could include: assessment and valuation, and shift the emphasis onto sustainable patterns of growth. 3. stimulating investment in low-carbon, • redesigning financial accounting procedures so that resource-efficient assets critical social and environmental issues are embedded in decision-making; The current set of global stimulus packages involve very 5. exploring sustainable growth substantial sums of money. However, we must look Current growth models are unsustainable. Many people • broadening the focus of rating agencies beyond solely critically at how far they combine the goals of generating would question whether economic growth that relies on short-term factors; economic growth and employment with the imperative for a increasing resource use can ever be sustainable. Certainly transition to a low-carbon, resource-efficient and equitable • introducing more effective scenario planning and we need to rethink our focus on GDP growth as a measure economy. Moreover, since this transition will require such a wider stress testing; and of success. But the financial system in particular relies on massive shift in investment, much of it necessarily coming an assumption of continuous growth – to repay credit plus from the private sector, we need to consider whether there • developing partnerships between public and private interest. So we need to examine what fundamental are suitable incentives in place. When current price signals sectors that can close the gap between short-term changes are required in this system, and explore: drivers of shareholder value and longer-term drivers are weak, we need to look at how private sector financial of public good. institutions can act, individually or in sector collaborations, • the extent to which business models to support to shift their portfolios to reflect the long-term interests of sustainable consumption can deliver growth that is their clients. And we need to explore the opportunities 'decoupled' from the depletion of environmental capital; arising from investment in adaptation, as well as 2. recapitalising – not just the banks, models for risk-sharing between the public and • how certain structures are better suited to delivering but social and natural capital too private sectors. sustainable growth; and The depletion of social and natural capital arises largely because we don't value them adequately. Halting and • the mechanisms that will be required for capital to be reversing this trend will require a combined effort by public allocated to activities that create sustainable growth. 4 14578 FFF Annual report V4 15/6/09 11:55 Page 6
1. introduction
The dramatic failure of the capital markets over recent months has caused shock and anger. It has brought widespread calls for fundamental reform. It has also initiated a much wider, and at times philosophical, discussion about the systems and values that made such a disaster possible. These themes have been explored in a recent pamphlet by Forum for the Future founding director Jonathon Porritt, Living within our Means.1 This paper takes up some of these themes and outlines some of the relevant work that Forum and others have been doing to identify, explore and address the barriers to sustainable financial markets.
As a sustainable development organisation working with business in general, and with the financial markets in particular, Forum for the Future has a unique perspective on the crisis. It is well-positioned to catalyse a discussion about the sustainable solutions. Our expertise in leadership, innovation and futures provides fresh perspectives on how we can deliver these solutions.
We hope that this paper will create a platform to bring together private and public sector organisations and NGOs, alighting on pinch points for change. Part of its purpose is to stimulate debate, and to help in gathering ideas on how some of the key issues are being tackled – or how they could be.
1 Porritt, Jonathon, Living within our Means, Forum for the Future, March 2009 5 14578 FFF Annual report V4 17/6/09 10:08 Page 7
2. diagnosing the problem: why capital markets currently fail
Left to their own devices, do capital markets act in the there is public outcry over the size and unconditionality of We are going to need a wide range of solutions here, public interest by ensuring the most efficient allocation of remuneration. And in particular it is seen as inappropriate because of the different nature of the incentives built into capital? Before the current financial crisis, voices could be that the individuals who gained so much during the good the system. These are explored in section 3.1. heard arguing that they do, with capital markets moving to years do not see a corresponding clawback during reflect appropriate prices (for example for scarce goods, or the downturn. to provide an appropriate reward for risk) if and when the ii) critical goods and services are not valued, or are need arises. These voices have been subdued (although It is clear that remuneration can incentivise short-term under-valued not silenced) in recent months as the catastrophic financial profit-maximising behaviour that may not be aligned with The financial markets fail to put a correct price on the social crisis has unfolded. the public good. It also perpetuates a culture in which success is judged purely on how much one person is paid and environmental goods and services that really matter. Forum’s work has highlighted five interlinked reasons why relative to another, which is difficult to reconcile with the Consequently, these elements remain ignored or the capital markets fail to work in the interests of society need for more sustainable patterns of consumption (see undervalued. These goods and services are wide-ranging. as a whole. section 3.5). Bank executives’ huge bonuses are used as a They include the quality of life in our communities, social reference point not only within the finance sector but also cohesion, wellbeing, and the ecosystems services that outside, with a range of negative outcomes. The most provide such basic human needs as clean water, clean air, pest control and climate regulation. Traditional financial i) incentives are not aligned with the public good obvious is the simple fact of a wider gap between the highest- and lowest-paid in society. Recent research has analysis cannot factor these goods and services into the Personal remuneration and positive recognition are based shown that this is a strong indicator of poor health across calculations it uses to decide which activities are worth on maximising short-term financial returns on capital. financial support. the whole of the society, rich and poor.2 Money managers therefore tend to make this their over-riding objective. Pension fund trustees assume that In terms of the environment, And these misaligned incentives arise in many different The Millennium Ecosystem this satisfies their fiduciary duty. Insurers generate annual 4 places. A company is deemed to be successful in the eyes Assessment (MA ),which was launched in 2000 and premiums for short-term cover without having to consider of its investors if it generates short-term profits for its produced its first report in 2005, makes the challenge clear. the long-term sustainability of the assets they insure. shareholders, reported on a quarterly basis. As a result, It found that: decisions on investment within companies will tend not to These misaligned incentives are deeply embedded in support measures to create long-term sustainability. But the system. 1 “Over the past 50 years, humans have changed this has not in fact proved to generate the best outcome for ecosystems more rapidly and extensively than in any shareholders. In its analysis of the Future of Capitalism 3, Bankers’ pay packets have perhaps generated the greatest comparable period of time in human history, largely to the Financial Times noted that, “Shareholder value, anger in the financial crisis. People were generally prepared meet rapidly growing demands for food, fresh water, like happiness and many of life’s other good things, to accept the fact of bankers winning large bonuses when timber, fibre and fuel. This has resulted in a substantial is best achieved by not aiming at it too directly”. It seems this seemed to be the price of the success of the financial and largely irreversible loss in the diversity of life on Earth. that there is scope for a move away from the system that sector. Now that the sector has failed so spectacularly – encourages too close a focus on quarterly earnings. 2 Wilkinson, Richard, and Picket, Kate, The Spirit Level: Why More Equal Societies Almost Always and dragged the rest of the economy into a recession – Do Better, Allen Lane, 2009 3 Shareholder Value Re-evaluated, The Future of Capitalism, Financial Times, March 2009 4 Millennium Ecosystem Assessment Findings, www.millenniumassessment.org, 2005 6 14578 FFF Annual report V4 15/6/09 11:55 Page 8
2. diagnosing the problem: why capital markets currently fail
2 The changes that have been made to ecosystems In the social context, our current financial system has Even within developed countries, an inability to place a have contributed to substantial net gains in human no capacity for exploring the wider social impact of value on social capital results in investment decisions that wellbeing and economic development, but these investments. Rising levels of inequity within local may unintentionally damage the quality of people’s lives. gains have been achieved at growing costs in the communities, countries and global societies are eroding The sale of school playing fields to property developers is form of the degradation of many ecosystem services, social capital and may increasingly lead to conflict. The one example. increased risks of nonlinear changes and the exacerbation starkest example comes from the growing gulf between the of poverty for some groups of people. These problems, rich industrialised countries and the poor in the developing Section 3.1 explores some of the ways in which the unless addressed, will substantially diminish the benefits world. Climate change, created by the industrialised world, problem of better valuation techniques might be addressed. that future generations obtain from ecosystems. is increasing the vulnerability of the poorest, making the Section 3.2 considers how this different perspective could inequities even more shocking. What is more, some of our result in a recapitalisation of environmental and social 3 The degradation of ecosystem services could grow attempts to combat climate change make matters worse, capital. Section 3.3 considers how better valuation significantly worse during the first half of this century because they do not consider the impacts on the poorest techniques could lead to greater investment in the transition and is a barrier to achieving the Millennium people. For example, massive investment in first-generation to a sustainable economy. Development Goals. biofuels, diverting land away from food production, was 4 The challenge of reversing the degradation of held partly responsible for significant food price increases ecosystems while meeting increasing demands for experienced in developing countries in 2008. And the iii) we lack imagination and awareness about services can be partially met under some scenarios impacts of the global recession (created through the new and systemic risks actions of a rich elite in the industrialised countries) are considered by the MA, but will involve significant The current crisis was caused in large part by failures in being felt particularly hard in the poorest countries that rely changes in policies, institutions and practices that risk assessment. Financial institutions did not adequately on the export of commodities. are not currently under way. Many options exist to assess the risks they were taking on through financial conserve or enhance specific ecosystem services in derivatives based on sub-prime mortgages. Although the Historically, the richer societies have often operated on ways that reduce negative trade-offs or that provide sub-prime mortgages themselves were real assets, they the assumption that our wealth can be maintained and positive synergies with other ecosystem services. were very vulnerable ones, and the monetary 'assets' increased in isolation from the developing world. There that were piled on top of them created an unstable 5 The bottom line of the MA findings is that human have been limited budgets for overseas development pyramid. Institutional and sectoral inertia obstructs actions are depleting Earth’s natural capital, putting assistance, based on what we felt we could afford once new thinking about evolving risks and fundamental such strain on the environment that the ability of the the needs of our own citizens have been met. However, future trends. planet’s ecosystems to sustain future generations can there is an increasing interdependence between no longer be taken for granted. At the same time, developed and developing countries created by resource the assessment shows that with appropriate actions constraints and climate change, which it is no longer it is possible to reverse the degradation of many possible to ignore. ecosystem services over the next 50 years, but the changes in policy and practice required are substantial and not currently underway.” 7 14578 FFF Annual report V4 15/6/09 11:55 Page 9
In consequence, investors may not properly consider what drives longer-term value in a particular sector, and the risk financial crisis ecological crisis drivers for investment remain weak in areas of the economy that will be critical to our future wellbeing – such as water Herd risk Many financial institutions were making Many economic activities make money technologies, resource replacement or climate change apparently high returns from sub-prime from depleting social and environmental mortgages and their derivatives, and capital. The incentive for individual actors solutions. The result is a powerful combination of each was taking comfort from the to behave differently is very limited, barriers preventing practical action to allocate capital to herd. “As long as the music is playing, particularly since a crisis can only be sustainable activities, even if agents in the capital you’ve got to get up and dance. averted through concerted action. markets do understand the long-term dangers at an We’re still dancing.” 5 intellectual level. Asymmetric risk Individuals could get a large personal Rich countries – and rich individuals The risks we failed to manage in the financial crisis can be reward from taking the risks, but would within countries – are enjoying the compared with the risks we are facing from the growing suffer no downside if the risk-taking benefits of a high-carbon and ecological crisis, as shown in the table opposite. failed: this created dangerous resource-intensive lifestyle, while the distortions. risks are being carried primarily in the poorest parts of the world.
Systemic risk Individual people or institutions were Individual companies are taking taking risks that they were comfortable action that may enhance their own with, but their models ignored their short-term profitability but which could interdependence with others. substantially reduce companies’ ability to thrive in the longer-term.
Disconnection risk Financial institutions had little We are disconnected from the connection with the people on the environment and from the people ground who took out the mortgages. who are affected by our actions. A more thorough understanding of the Our choices show a preoccupation real asset being financed might have with financial capital and a lack of resulted in a more prudent approach. awareness of social, natural and human capital.
New and unfamiliar risks In the case of the complex financial We do not understand the risks instruments that brought down the that we are running, for example in financial system, many of the risks destroying biodiversity or ignoring were simply not understood. increasing social inequity.
5 Citigroup’s chief executive, Charles O. Prince, interview with the Financial Times, July 2007 8 14578 FFF Annual report V4 15/6/09 11:55 Page 10
2. diagnosing the problem: why capital markets currently fail
Alan Greenspan, who was chairman of the Federal Reserve for the two decades before the crisis erupted, subsequently (iv) regulation is inadequate v) ‘progress’ is based on unsustainable growth expressed shock and disbelief that the banks had taken models fuelled by credit Regulation was evidently unable to prevent the crisis. such risks with their shareholders’ money. But the reasons And this, not surprisingly, is the area that has received Growth trumps all in today’s capitalist world. The supposed outlined in the table had created a powerful combination of most attention in the immediate aftermath. Governments benefits of exponential economic growth (as measured drivers for this seemingly reckless risk-taking. (particularly in the US and the UK) have been keen to put by GDP) have become, quite literally, ‘articles of faith’. Section 3.1 explores the role of better risk assessment regulation in place to try to prevent another melt-down of However much governments may sign up to the principles techniques in changing the way the finance sector this kind in the future. They want not only to act, but to be of ’sustainable economic growth’, the focus of efforts is on understands and responds to future uncertainties. seen to act, providing the decisive response that the economic growth, and sustainability is an afterthought. public wants to see. This approach has significant weaknesses. Per capita GDP In the wake of the financial crisis, many specific areas is an ineffective yardstick for progress. The measure stand out as targets for structural reform: provides a justification for consuming natural resources in the present, rather than preserving them for future • the separation of retail and investment banking generations. And the financial system we have at present relies on continuing growth to service credit. Thus the • short-selling system itself creates a trap, whereby we have to have growth – in order to repay principal plus interest. It is • remuneration and bonuses clear that we will have to rethink our attitude to growth. • complex financial instruments Demand for resources already exceeds the planet's capacity to replenish its ‘natural capital’ by about a third. • interventions to support key markets If global growth and consumption continues at the same rate, by the mid-2030s we will need the equivalent of two • tax havens. planets to maintain our lifestyles.
Each of these has relevance to wider sustainability. So can we ’decouple’ resource use and carbon emissions from economic growth by making things more efficiently? But can regulation be the answer? Will ‘better’ regulation Or is a more radical solution needed, with a rejection of be able to prevent another financial crisis? In particular, can growth as the primary focus? What will this do to the regulation by individual countries ever be designed to cope capitalist system, which seemingly relies inexorably on with the current global financial system? growth to service the credit that it generates? We explore these issues in section 3.4. Section 3.5 explores some answers to these questions.
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3. finding solutions: where to focus attention
In the light of the diagnosis above, there are five main areas markets. These Principles have stood the test of time. This may be because of the short-term perspective on which we suggest that we should focus attention, to find They call for the exercise of equity ownership, to promote of most investors, and the misalignment of incentives. solutions for the current failure of capital markets. efficient and sustainable asset use and risk management. In some cases, too, companies fail to provide They urge high levels of transparency and high standards of adequate information to enable them to understand 1 rethinking risk assessment and asset valuation corporate governance around the activities being financed. both the risks and the opportunities arising from techniques They call for the cost of environmental and social risks to a changing world. Even when such information is be priced into financial and risk management products. presented, it is often 'buried' in corporate social 2 recapitalising – not just the banks, but social and All of these principles bear repeating in the wake of the responsibility reports which mainstream financial natural capital too financial crisis. analysts never read – and which cover social and environmental issues without making the connection 3 stimulating investment in low-carbon, If a financial institution has no incentive to manage these to company value. resource-efficient assets risks, then its decisions on capital allocation will be flawed in sustainability terms. However, they might make perfect re-regulating capital markets – including remuneration 4 sense in the context of enhancing short-term client interests or the shareholder value of the institution itself. 5 exploring sustainable growth.
Much has been written (not least by Forum for the Future 7) about why, in principle, shareholder value can be increased In this paper, we explore each of these in turn, highlighting if companies embed sustainability into their operations. case studies and suggesting who needs to collaborate to Studies show a wide range of examples of how certain find the solutions. companies have added value through a focus on sustainability. Attempts have been made to calculate the 3.1 rethinking risk assessment and premium they have achieved by so doing. For example, asset valuation techniques scenarios in a report by the Carbon Trust and McKinsey Inadequate risk assessment and asset valuation techniques in September 2008 on the impacts of climate change create fundamental flaws in the financial system. showed up to 80% value creation opportunity being available for well-positioned, proactive companies, as The high level of risk-taking in the financial markets had against a potential 65% value-at-risk for badly positioned been evident for some time before the crisis, although the or laggard companies.8 scale of the fallout took almost everyone by surprise. The London Principles6, developed by Forum for the Future Nevertheless, many investors do not consider social and as far back as 2002 and launched by Tony Blair at environmental issues to be material to companies’ turnover that year's Johannesburg Summit, outlined seven and profitability. 6 Financing the Future: the London principles of sustainable finance. Forum For The Future, September 2002 7 For example, Sustainability Pays, March 2002; Competitiveness and Sustainability,building the best future characteristics that underpin the sustainability of financial for your business, November 2008; and Leader Business Strategies, January 2008 8 Climate Change, A Business Revolution, Carbon Trust, September 2008 10 14578 FFF Annual report V4 15/6/09 11:55 Page 12
3. finding solutions: where to focus attention
better research – the London Accord carbon emissions a cost to business means that there is a come much less from how their customers rate them on The London Accord, launched in 2007, is one initiative commercial incentive to reduce emissions, and to develop social and environmental issues, and much more from that seeks to improve the research available to analysts. new activities that can benefit from carbon credits. being seen to provide value for money immediately. This is Forum for the Future was involved from the outset and especially true in recessionary times. contributed to the shaping of this project, which started Many would argue that this misses the point: no as a collaborative activity involving 11 City research market could ever properly account for the value of the Some individual companies, however, have taken the view institutions and several academic organisations, think- environment. However, investment funds are allocated on that they want to take a principled stand, and others have tanks and NGOs. The initial aim was to produce an the basis of prospective financial returns. Pension fund identified dividends from a ‘responsible’ approach in terms analysis of the various investment solutions to combat managers are selected on their ability to generate returns of reduced costs, greater innovation or enhanced customer climate change, and so to understand which of these for their clients that are higher than the average in the loyalty. In addition, sector initiatives have been developed could generate the best return for money in terms of ’cash market. Individuals are remunerated on the basis of the in an attempt to create a coordinated response which in, carbon out’. Since the production of its first report in clients they attract and their own performance relative to addresses the ‘free-rider problem’. December 2007, the London Accord has now evolved into the market. Recent plunges in the value of shares across a wider ‘open research resource’. It makes available the board have heightened the concerns of pension fund And some companies have delved deeper. Forum for the research on environmental, social and governance issues, trustees to ensure that investments are making the best Future has worked with partners, like First Choice, to help both to raise awareness of their relevance to investment return possible, to try to close the gap. improve their understanding of their value at risk from social decisions, and to help inform public policy. and environmental issues, thereby making them better www.london-accord.co.uk So, as part of the re-regulation of the market (see 3.4), placed to respond. we would argue that it will be critical to create tools and But even with good information and aligned incentives, our incentives for fund managers to take social, human current system throws up barriers. Companies do not and natural capital into account. Attempts to incorporate a internalise key risks because our current financial systems monetary value for these elements into standard financial have no means of taking account of the stock and flow of projections are in their infancy. It has taken several years to certain valuable assets. Despite regulations designed to get the carbon market into its current state, and even now prevent the worst excesses, the 'free-rider problem' it is not yet functioning effectively to bring about a price remains; a company that can get away with paying less that fundamentally shifts market behaviour. And while than its peers for protecting the external environment from the value of ecosystems services is clear, we have no its effluents, for example, or spending less on keeping its mechanisms whatsoever for incorporating the value of workers safe and healthy, may be rewarded by an increase these scarce resources into our decision-making in its share price (in the short-term at least). on investments.
Market mechanisms such as those designed to create a For some companies, effective management of social, carbon market or introduce green taxes may play a role human and natural capital is central to brand value. But for in getting companies to internalise these costs. Making the vast majority of companies, brand value and reputation 11 14578 FFF Annual report V4 15/6/09 11:55 Page 13
exploring value at risk with First Choice regulation and a breakdown of communities. But individual In 2005, First Choice, a tour operator with a mix of companies that contribute to these outcomes can highlighting important initiatives nevertheless appear very successful, in terms of the businesses, approached Forum for the Future to explore The UN-backed Principles for Responsible Investment indicators we currently apply. And it may not be in the how to bring sustainability into its strategy. First Choice (PRI) is an association representing some of the world’s interest of any individual company to take action, because uses a recognised strategic planning framework largest pension funds. The PRI has reiterated the role of this will simply be to its own detriment (unless it can find a known as 'managing for value', with four clear steps: institutional investors in creating a permanent shift towards branding and marketing niche) if all other companies establishing the fact base (through external assessment); greater sustainability in financial markets.9 The key factors it continue to contribute to the problem. exploring issues and alternatives; selecting options; and highlights are greater due diligence within the investment implementation. Forum found that First Choice's existing chain, much smarter risk management, and factoring into The financial sector does not bear all of the responsibility fact base was strong on demographics and market investment decisions the full spectrum of environmental, for this. But it does decide where capital gets allocated trends, but did not include issues like climate change or social and governance (ESG) issues that impact in the economy. It can give support to activities that water shortages at resorts. We worked with the asset values. generate profits at the expense of, or in line with, executive directors and their direct reports to identify www.unpri.org what the key sustainability issues are for the business. long-term benefits for society. And the profit-maximising behaviour that led to the financial crisis has dealt a severe The ‘GS Sustain’ framework developed by Goldman blow to the argument that precisely this maximisation In order to evaluate projects, First Choice uses a value at Sachs10 couples ESG performance with other indicators of short-term profits will tend towards the greatest risk (VAR) model, which takes the forecast cash flows of of corporate performance such as management quality, efficiencies – and therefore lead to the greatest an option and turns them into a net present value. industry structural themes and financial returns. public good. In effect, options are prioritised according to their The framework has been particularly successful in contribution to shareholder value. With the cooperation demonstrating value in firms developing alternative energy, We know that personal incentives were misaligned. of the finance department, we were able to use the VAR environmental technology and biotech. These firms' The tools at the disposal of the capital markets were (and to show that issues like climate change were material to aggregate earnings growth forecast was three times still are) inadequate, in that they only look at the short-term the share price – and on a similar financial scale to other greater than their peers. and they ignore natural and social capital. But if there strategic decisions the business was making. http://www2.goldmansachs.com/ideas/environment-and- were incentives to do so, then the tools and the valuation energy/goldman-sachs/gs-sustain/index.html This type of analysis, however, has not yet been widely techniques would quite quickly be developed. They could be based on frameworks such as the Five Capitals (see taken up. It has not altered enough corporate strategies. Generation Investment Management integrates ESG section 3.2) and the work of the recent EU-backed initiative, We are still on a trajectory that will lead us inexorably issues into its investment decisions, in the expectation The Economics of Environment and Biodiversity (TEEB), towards climate change, critical resource constraints, that this will lead to outperformance over the long-term. which is outlined in section 3.3. inequity and conflict. www.generationim.com
Over the longer-term, of course, it is clear that the economy We urgently need to find new ways of embedding social, in general cannot survive and thrive if there is no clean human and natural capital into decision-making 9 Media Release: Global pensions fund leaders call for more active, collaborative owners in response water, a hostile climate, infertile soil, no natural pest on investments. to crisis, UN Principles for Responsible Investment, London, March 2009 10 GS Sustain, Goldman Sachs, June 2007 12 14578 FFF Annual report V4 15/6/09 11:55 Page 14
3. finding solutions: where to focus attention
Accounting For Sustainability (A4S), created by HRH recommendations developing these recommendations will require Prince of Wales Charities in 2004 has, to date, collaborated collaborative input from: 1 create and support incentive schemes that with over 150 public and private sector organisations and incorporate longer-term considerations; NGOs to help account more accurately for the wider social • company chief executives and environmental costs of their activities. A4S is building 2 redesign accounting for investments so that critical • representatives from rating agencies on the work done in this field through the UN-backed social and environmental issues are embedded in • investment analysts Global Reporting Initiative, AccountAbility and Defra / decision-making – for example, through Trucost. It focuses on three specific areas: the integration • accounting firms ‘value-at-risk’ methodologies; of sustainability reporting into management and financial • management accountants reporting; the embedding of sustainability into day-to-day 3 expand the role of the rating agencies so that they decision-making; and the interlinking of organisations to are rating risk not only from short-term factors but • business schools share knowledge. also from longer-term issues that are relevant to the • regulators www.accountingforsustainability.org public good; and • pension fund consultants UK Sustainable Investment and Finance (UKSIF) is an 4 promote partnerships between public and private • risk managers in banks association of responsible investors. UKSIF has set up a sectors that close the gap between short-term ‘Finance for a Sustainable Recovery’ blog, and launched a drivers of shareholder value and longer-term drivers • behavioural psychologists Sustainable Capital Markets Library and a Sustainable of public good. • environmental economists. Recovery Discussions log. www.uksif.org
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3.2 recapitalising – and not just the Five Capitals framework manufactured capital comprises material goods or the banks At Forum for the Future we consider that, to be truly fixed assets which contribute to the production process sustainable, businesses must identify, measure and rather than being the output itself – e.g. tools, machines For the future, we can hope that appropriate regulation, manage their impacts in five key areas – the Five Capitals. and buildings. incentives, risk management and valuation techniques are put in place to reduce the likelihood of capital being natural capital is any stock or flow of energy and financial capital plays an important role in our economy, allocated to activities detrimental to the public good. material that produces goods and services. It includes enabling the other types of capital to be owned and We can even hope that measures put in place now will resources – renewable and non-renewable materials; sinks, traded. Unlike the four other types, however, it has no real encourage investment in activities that actually promote the that absorb, neutralise or recycle wastes; and processes – value itself, but is representative of natural, human, social public good. But we are still faced with the legacy of our such as climate regulation. Natural capital is the basis not or manufactured capital e.g. shares, bonds or banknotes. past profligacy with natural, social and human capital. only of production but of life itself. We need to find ways to recapitalise and protect We are facing a sustainability crisis because we are these assets. human capital consists of people's health, knowledge, consuming our stocks of natural, human and social capital skills and motivation. All these things are needed for faster than they are being produced. Unless we control This will require taking measures to repair, conserve, and productive work. Enhancing human capital through the rate of this consumption, we cannot sustain these prevent further degradation and decline. education and training is central to a flourishing economy. vital stocks in the long-term. By maintaining and trying to increase stocks of these capital assets, we can live off the First of all, following on from the themes in the previous social capital concerns the institutions that help us income without reducing the capital itself. But for this to section, we need to find ways to value capital more maintain and develop human capital in partnership with happen, every organisation needs to find ways to assess effectively so that we are aware of the impact of certain others – e.g. families, communities, businesses, trade their use of these capital assets and to manage investment decisions on the erosion or enhancement of unions, schools, and voluntary organisations. them sustainably. natural and social assets. The different forms of capital are outlined in the box opposite. We can try to regulate to create a price for these capitals. advantage from the unsustainable use of social or Measures that seek to give carbon a price in the market are environmental resources. a case in point. But regulation designed to internalise the cost of ’public goods’ may not be capable of delivering The rapid rates of deforestation provide an obvious change quickly enough – as is becoming increasingly example of the need to take action. The UN Food and apparent. So we need forward-thinking financial institutions Agriculture Organisation estimates that 15 million hectares to develop ways of embedding wider values into their of tropical forests are converted to other land uses every investment decisions. Individual financial institutions may year. That's an area larger than England. The impact of this need to come together to explore collaboratively how the forest loss affects not only carbon emissions, but a wide market – and financial analysis – can achieve this, without range of other important benefits, such as water simply inviting their competitors to gain short-term catchment, forest peoples’ livelihoods and biodiversity.
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Back in 2007, the Stern Review11 argued that investment in Contrast this with the way governments have acted on One further aspect of the recapitalisation discussion is the climate change mitigation now could save substantial costs the recapitalisation of the banks. The size of the funds restoration of depleted social capital. As commented later. Since then, the science of climate change has been allocated to this, worldwide, has been truly staggering. elsewhere in this paper, a dialogue around the questions demonstrating an even greater need to take action now And the basis for doing so? A close parallel with Stern's of fairness and responsibility is sorely needed. before it is too late. But what has been done? While argument: the realisation that money spent now will reduce economists are still debating the discount rates applied in the possibility of a complete breakdown of the financial Inequality is increasing. The average African household Stern's calculations, we are still not acting on his arguments. system in the future, making it a worthwhile investment. today consumes 20% less than it did 25 years ago. Americans and Europeans spend $17 billion a year on pet forest investment – monetising public goods carbon do not reflect the full range of forest value. Some food, $4 billion more than the estimated annual additional total Studies have shown that the value of the forests currently calculations13 estimate that only 20% of a forest’s value needed to provide basic health and nutrition to everyone in being cut down every year can be calculated at comes from its carbon storage effect, while the remaining the world. Climate change is exacerbating the inequalities, $3-5 trillion12; this figure takes into account the impact on 80% comes from its other ‘services’. as weather shocks become more prevalent and food carbon emissions, biodiversity, rainfall effects, soil depletion prices increase. and so on. Yet there are no mechanisms currently in play to So Forum and others are looking at ways in which public capture that value in the market. Local communities often sector funds can be used to de-risk and catalyse private Because of twentieth century advances in media, see less value in standing forest than in alternative land sector investment in forests. The aim is to provide an communication and transport, we are much more aware of uses. Investors see high risk and low returns. appropriate blend of private returns on funds put at risk, these disparities than ever before. We are also increasingly and to generate public good from the public monies conscious of the impact of our purchasing decisions on the There are some pilot schemes working on solutions. used to enable this private sector investment. social capital of the communities involved. The significant In Guyana, for example, a project called Iwokrama is growth in the market for fair-trade goods is one indication of a working up models whereby payments can be made to the Critics of this approach say it attempts to monetise change in behaviours. Recent record fundraising events (such government for 'ecosystems services'. The model goods which are in effect priceless, and clearly this as Comic Relief in the UK) seem to indicate that individuals envisages that the government will then deploy those argument is a strong one. But economic drivers are want to get engaged. The success of bonds recently issued by payments on activities to create jobs and promote wider creating the deforestation in developing countries and HSBC in support of immunisation is further evidence. These economic development. But at present this type of scheme the only effective way to respond in many cases is successes may lead to further innovative funding mechanisms can only be carried out on a small scale. Investors do not through economic incentives. As a global society, that involve both voluntary contributions and investment. currently see an appropriate risk-reward profile. we will only start to value the forests properly when we see the shortages and suffer the effects of The costs of recapitalisation may be paid back quickly in The growth of the carbon markets could in principle help their loss. terms of the benefits it delivers – the enhanced financial to increase the flow of capital to 'avoided deforestation', returns that come from greater efficiency, as well as social if forest carbon credits are included in the Kyoto protocol And we will have lost precious time if we wait until and environmental returns that have obvious value but may and in regional trading schemes such as the EU's culture and behaviour change results in an increased not so easily be monetised. Emissions Trading Scheme. But this is unlikely to be recognition of the public goods that we can’t afford to 11 Stern, Sir. Nicholas, Stern Review on the Economics of Climate Change, October 2006 embedded for some time. And in any case, payments for lose. So, the public sector has to take a lead. 12 The Economics of Environment and Biodiversity (TEEB) 13 For example, by the Global Canopy Programme www.globalcanopy.org 15 14578 FFF Annual report V4 15/6/09 11:55 Page 17
• rethink today’s subsidies to reflect tomorrow’s Proactive Investment in Natural Capital (PINC) is a highlighting important initiatives priorities; proposed system to economically reward large areas of intact tropical forests for their action as ‘global utilities’ – providing The Natural Value Initiative is an attempt to provide a • reward currently unrecognised ecosystem services, ecosystem services that underpin food and energy security at framework for the finance sector to evaluate the risks to and make sure that the costs of ecosystem damage local to global scales. PINC is therefore not related to carbon businesses associated with the loss of naturally-provided are accounted for, by creating new markets and emissions reductions. Instead, it calls for straightforward eco-services through degradation of ecosystems and promoting appropriate policy instruments; funding for forests, which absorb and store carbon, create biodiversity. The evaluation ‘toolkit’ is currently being piloted rain, moderate weather conditions and maintain biodiversity. on the active investment holdings of a number of finance • share the benefits of conservation; and These are ecosystem services that we all currently benefit institutions including Banco Real, F&C Asset Management from, but do not yet pay for. Since these are all public goods, and Morley. The aim is to build awareness and expertise • measure the costs and benefits of ecosystem services. the international community needs to design a system that within the finance sector on the dependencies of the recognises and generates revenues to pay for them. food, beverage and tobacco sectors on biodiversity and In Phase 2, TEEB plans to publish a framework to www.globalcanopy.org ecosystem services, and to drive the integration of related help frame valuation exercises for most of the Earth’s issues into investment decisions. The toolkit primarily ecosystems, and to engage end-users so that the work is The International Finance Facility for Immunisation consists of the Ecosystem Services Benchmark (ESB). This as focused as possible on their needs. provides a good example of how innovative financing evaluates the extent to which companies have systems in http://ec.europa.eu/environment/nature/biodiversity/econ techniques can be deployed to enable investment in place which adequately identify and control the material omics/pdf/teeb_report.pdf long-term protection of social and natural capital. It was business risks associated with their dependency and established to bring forward the flows of Overseas impacts on ecosystem services. The focus is on risk and The Prince’s Rainforest Project (PRP) has developed a Development Assistance (ODA) allocated to immunisation opportunity identification, prioritisation and management, proposal for emergency funding to help protect rainforests programmes in developing countries, enabling the combined with evaluation of performance on the ground. and to use incentives to encourage rainforest nations to programme to be rolled out much more rapidly than First results of the pilot scheme are due out in late 2009. continue to develop without the need for deforestation. would otherwise have been the case. The structure www.naturalvalueinitiative.org The goal of the project is to achieve a significant and involved raising the up-front finance through issuing a relatively fast reduction in tropical deforestation by helping bond, bought by the capital markets. Payments on the The Economics of Environment and Biodiversity (TEEB)14 rainforest nations to focus instead on alternative, more bond have been taking place through the flows of ODA aims to promote a better understanding of the true environmentally friendly (low-carbon) economic over time. Interest payments to bond-holders, and the economic value of ecosystems services, and to offer development activity. The PRP Emergency Package transaction costs involved in setting up the bond, are economic tools that take proper account of this value. proposal aims to produce sizeable funding quickly. outweighed by the reduced costs and increased benefits In Phase 1 it provided some key principles for developing This money will come from an innovative public-private that accrue from early prevention of disease. the economics of ecosystems and biodiversity: partnership in developed countries, which could include www.iff-immunisation.org the issuing of Rainforest Bonds. www.rainforestsos.org
14 The Economics of Ecosystems and Biodiversity, Interim report, European Commission, 2008 16 14578 FFF Annual report V4 15/6/09 11:55 Page 18
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recommendations 3.3 stimulating investment in low- The 'green' proportion varies greatly from region to region, however.16 In the UK it has been particularly small. 1 More (and more definitive) calculations are required carbon, resource-efficient assets A report by nef (New Economics Foundation) in March 2009 to demonstrate that up-front investment in natural The previous section considered the need to protect, calculates that new and additional green spending constitutes and social capital has benefits that substantially preserve and restore natural and social capital. While this just 0.6% of the UK’s £20 billion recovery plan. This outweigh the costs over the medium-term. The Stern is necessary – indeed essential – it is still far from sufficient represents less than 0.001% of UK GDP, compared to the Review achieved this for climate change. TEEB is to create a transition to a low-carbon, resource-efficient, 0.8% which the Stern Review regarded as necessary.17 exploring this for biodiversity. A wider range of equitable world. Investment in new areas has to play a And the new and additional green spend, amounting to just private sector finance institutions should engage central role in this transition. over £100 million, is going almost entirely on the ‘warm front’ in this process, in recognition that they are part grants programme for improved household energy efficiency. of the solution. Investment in clean technologies is a key focus. And 2 The private sector must be engaged in the cleantech has in fact received substantially more attention Are these energy efficiency measures the most effective recapitalisation programme, through appropriate from investors over the last two to three years. This has elements within domestic stimulus packages, in terms of risk-sharing mechanisms. been driven in part by high oil prices and concern the joint objectives of promoting economic recovery and over energy security. It is also partly due to growing achieving sustainable low-carbon growth? Yes, according developing these recommendations will require recognition of the scale of the climate change challenge, to an assessment by Nicholas Stern and Alex Bowen and the increasing likelihood of a regulatory response collaborative input from: of the Grantham Institute 18; steps such as improving from governments. • investment analysts insulation of homes and offices do indeed score particularly highly. Lower on the scale come large ‘green’ infrastructure • central government and local authorities Some of this investment in clean technologies is coming projects such as carbon capture and storage (CCS) which from governments, whether as part of their global stimulus fail to provide an immediate shot in the arm for the • economists packages or in more general terms, while some comes from economy. Other measures that do well are the acceleration private sector financial institutions. Clearly, these two • investors working on natural value, for example of planning processes for wind farms (although this failed streams can be used together, with appropriately targeted through the TEEB project the timeliness test), the improvement of fuel efficiency of public sector investment acting as the catalyst for vehicles, and the expansion of forests and other • NGOs working on the value of the natural increased private sector investment. rural ecosystems. environment, such as the Natural Value Initiative and the Global Canopy Programme In several of the recent stimulus packages announced by
governments across the world, there have been substantial 15 Harvey, Fiona, The Green New Deal: a massive injection of clean energy cash, Financial Times, March 2009 • infrastructure developers, including housing attempts to embed measures to combat climate change 16 In the USA, the Obama administration's $787 billion package includes $100 billion (13%) attributable to spending on green measures, or nearly 0.8% of GDP. The EU's $22 billion spend on green measures companies constitutes 59% of its total proposed packages. China is devoting 38% of its total stimulus to green into the revitalisation of the economy. According to a recent measures, and South Korea is spending $30 billion, or no less than 81% of its $38.1 billion package, on green measures. Contrast this with Germany at 13% ($13.8 billion), the UK at 7% ($2.1 billion), Japan at 15 HSBC study , the $2.8 trillion committed to the combined 3% ($12.4 billion) and Italy at 1% ($1.3 billion). (Bernard, Steve; Asokan, Shyamantha; Warrell, Helen; • NGOs working in the built environment. and Lemer, Jeremy, Which country has the greenest bail-out? Financial Times, March 2009) global stimulus effort contains approximately $430 billion 17 Simms, Andrew, Johnson, Victoria and Nissan, Sargon, Green Stimulus or Simulus? The New Economics Foundation for Greenpeace, March 2009 (15%) committed to green measures. 18 Bowen, Alex, Fankhauser, Sam, Stern, Nicholas and Zenghelis, Dimitri, An outline for the case of a ‘green’ stimulus, policy brief, Grantham Research Institute, Centre for Climate Change Economics and Policy, February 2009 17 14578 FFF Annual report V4 15/6/09 11:55 Page 19
A report published by the Sustainable Development carbon vehicles as particular areas of focus. It also refers to These will of course require substantial investments by Commission (SDC) in April 2009 19 proposes a targeted solar power, building technologies, geothermal and carbon private sector financial institutions. This will clearly depend stimulus package that focuses on six priority areas for finance as sectors with potential for significant growth. on the financial returns being sufficiently attractive. Here, maximum impact: once again, we come up against the dilemma of short-term Climate Finance returns versus long-term, sustainable returns. Capital will • upgrading existing housing stock Climate Finance was launched in 2009 by Forum for the not be allocated to low-carbon or resource-efficient Future to pilot the use of innovative financial models by technologies without the right price signals – and the • scaling up renewable energy supply the UK public sector to tackle climate change. The project carbon market is not currently delivering these. And, as we • redesigning the national grid challenges the traditional reliance on financial grant schemes have reflected above, the price of other scarce resources for carbon saving measures. Instead it explores more (water, forests, natural fisheries, biodiversity) also currently • promoting sustainable mobility efficient ways of delivering carbon savings with the same fails to reflect their true value. So what is to be done? • low-carbon investments in the public sector capital, or with capital leveraged from the private sector.
• skills for a low-carbon, sustainable economy. Examples include: • revolving loan funds to unlock energy efficiency The report argues that this level of investment – around savings in buildings that carry a high upfront cost; 50% of a total recovery package of 4% of GDP – could be achieved by a careful combination of deficit spending; • energy service companies (ESCos) like Thameswey climate bonds and other ’invest to save’ measures; Energy that supply locally generated heat and environmental taxation; and equity stakes. More than 50% electricity to businesses and housing, and of the package would generate significant financial returns • innovative emissions trading and offset schemes. within two to three years, and could create at least 800,000 jobs. The project will apply these models in pilot schemes run by participating public sector organisations. It will In the UK, the government recently launched its Low Carbon communicate its findings to ensure that they lead to more Industrial Strategy20 which outlines strategy for change in widespread use of smarter finance. Many of the models centre four main areas – energy efficiency, energy infrastructure, on empowering and enabling individuals, families and/or low-carbon vehicles and making the economic environment public sector organisations to make more sustainable choices attractive for low-carbon businesses. about what they consume – without imposing solutions.
The strategy seeks to outline the areas of competitive They promote the transition to a low-carbon economy by advantage for the UK in moving towards a low-carbon building social and manufactured capital in tandem. world. It identifies carbon capture and storage, offshore wind generation, marine energy, nuclear energy, and low- 19 A Sustainable New Deal, Sustainable Development Commission, April 2009 20 Low Carbon Industrial Strategy: A vision, HM Government, March 2009 18 14578 FFF Annual report V4 17/6/09 10:09 Page 20
3. finding solutions: where to focus attention
There are broadly three choices. The second is for governments to find ways to support, Part of the drive towards this rethinking will come from The first is for governments to continue to try and create de-risk and incentivise private sector institutions through imagining the alternative futures that could emerge. the right price signals through market mechanisms, such as public-private partnerships of various kinds. Such We tend to assume that business will carry on as usual, the carbon markets and the market for payments for partnerships could make it possible for investments to and we find it hard to envisage disruptive shocks that will ecosystems services. This is important but it may take some generate financial returns (to the private sector) alongside fundamentally alter the trajectory. Maybe it will be easier to years to get these markets right, and time is not on our side. social and environmental returns (to the public sector). do this now that we have just had such a shock, in the Innovative structures – such as the concept of emissions- form of the financial crisis. But very few of us, either as target-linked bonds21 proposed by the founders of the One of the difficulties here is how to measure social and individuals or within our organisations, have really thought London Accord – might help to strengthen the market in environmental returns in a way that convinces governments through how, for example, the science of climate change the short-term. that they are getting value for money. (increasingly certain and daily more pessimistic) will translate into change on the ground. The recent nationalisation of some of the UK’s big banks presents some interesting opportunities in the area of The US banks have recently been subjected to ’stress tests’ public-private partnership. to establish whether they will be resilient under certain scenarios for the economy. This has been an important The third choice may seem a little far-fetched to some part of planning the interventions that may be required to people, but it does make some sense. It involves the maintain stability in the future. A similar concept could private sector financial institutions themselves rethinking and should be applied on a wider scale to assess the their strategies for maximising returns over the short-term, vulnerability of the financial system to fundamental shocks and reorienting their businesses towards serving the caused by climate change and resource constraints. These long-term needs of their customers – and persuading ‘sustainability stress tests’ for financial institutions would be their shareholders that this is in their interests as well. very revealing and could help to highlight the policies that This may not even be all that difficult. People saving for a are required to prevent the worst outcomes. pension, for instance, want to have the security of a solid investment, but can see that a focus on short-term returns has served them very poorly to date.
21 Index-Linked Carbon Bonds, Gilty Green Government - Mainelli, Onstwedder, Parker and Fischer, April 2009 19 14578 FFF Annual report V4 15/6/09 11:55 Page 21
Climate Futures22, a recent piece of work carried out by Forum for the Future with the support of HP Labs, explored five scenarios for the medium-term future. These scenarios, and their implications for investors, are summarised in the table below.
scenario what the scenario means implications for investors
Efficiency first Rapid innovation in energy efficiency Opportunities for investment in new and novel technologies has enabled a types of low-carbon and resource- low-carbon economy with almost no efficient technology need for changes in lifestyle or business practice.
Service transformation A high price of carbon has ushered in Opportunities for investment in new a revolution in how people’s needs types of business models that can are satisfied. deliver carbon reductions and resource-efficiency rather than on new technologies per se.
Redefining progress New priorities of ‘wellbeing’ and Successful businesses are those that ‘quality of life’ are bubbling up across improve health and wellbeing, the world as more sustainable forms of contribute to society and champion living become established. long-term sustainability, so investors put a premium on these characteristics.
Environmental war economy Tough measures have been adopted to The emphasis for investors is on combat climate change, including the managing risk, trying to ensure that rationalisation of whole sectors to the companies they invest in are not reduce their climate change impacts, caught up in sector rationalisation and and close monitoring of individual economic instability caused by high carbon usage. commodity prices and climate shocks.
Protectionist world Globalisation has gone into retreat and Investment is mostly in adaptation countries focus on security and access efforts, security technologies and to resources at any cost. resource replacement.
22 Climate Futures, Forum for the Future, October 2008 20 14578 FFF Annual report V4 15/6/09 11:55 Page 22
3. finding solutions: where to focus attention
Investment in climate change mitigation efforts is crucial. result of the carbon emissions already locked into the So there will be many changes to the investment landscape But unfortunately, irrespective of how far we succeed in atmosphere. There will therefore be a need for investment in the coming years. Transition to a low-carbon economy reducing carbon emissions from now on, the science tells in adaptation, particularly – and most urgently – in the will be a key feature of this. Depending on the speed and us that we will still experience some climate change as a developing countries. scale of the transition, there will also be a growing need for investment in adaptation. Whatever happens, it is clear that investment in adaptation business as usual is not a possible scenario. The loss of natural capital is felt most immediately in But how can investment in this necessary adaptation developing countries. There are three principal reasons for take place? The developing countries themselves cannot this. The first is that people in developing countries are fund it. The governments of rich countries do not have a highlighting important initiatives more dependent on agriculture for their livelihoods, so they mandate from their citizens to provide the substantial The Carbon Disclosure Project (CDP) is an independent are particularly vulnerable when soil becomes less fertile, scale of funding that projects of this kind will require. not-for-profit organisation which holds the largest database rivers dry up, and floods and sea level rises reduce the So private sector investment needs to be brought of corporate climate change information in the world. viability of land and destroy crops. The second is simply into play. But the private sector is very reluctant to take It represents 475 investors with combined assets of $55 the geographical location of developing countries in on developing country risk. And the returns from many trillion. Research in 2009 23 showed that many investors regions where extreme weather shocks are more likely to of these activities may not be clear. place a high value on the information generated by the CDP. happen. The third is that in most developing countries This research also highlighted that there is significant scope people cannot fall back on structures set up by the state to However, in many examples there may be a strong for investors to improve the way they analyse climate risks support them in a crisis caused by depletion of natural business case, so appropriate risk-sharing and opportunities. capital or weather shocks. between public and private sectors could generate www.cdproject.net some very valuable flows of capital towards The developing countries need to invest in adaptation adaptation. The P8 is an initiative coordinated by the Cambridge of various kinds. This may entail investment in flood Programme for Sustainability Leadership looking at how defences, climate-resilient infrastructure, and early Forum for the Future has been working with the UK’s pension funds can take a lead in financing the transition to warning systems to minimise damage. It may involve Department for International Development, Acclimatise, a low-carbon economy, especially through the allocation systems and processes to minimise disruption and loss and some forward-thinking financial institutions to of capital to clean technologies and forests. after weather events. Or it may mean a shift to different produce a tool-kit for investors to think more rigorously http://www.cpi.cam.ac.uk/programmes/energy_and_climat goods and services, such as more climate-resilient through the climate impacts of their investments. e_change/p8_group.aspx crops, water desalination plants or new appropriate technologies. nef (the new economics foundation) was one of the first organisations to call for a Green New Deal, in collaboration with others who have created the Green New Deal Group. www.neweconomics.org
23 CDP Investor Research Project – Investor use of CDP data, Carbon Disclosure Project, February 2009 21 14578 FFF Annual report V4 15/6/09 11:55 Page 23
recommendations developing these recommendations will require 3.4 re-regulating capital markets collaborative input from: 1 Private sector finance institutions should What can re-regulation do, to help bring the incentives for reconsider their strategy for a low-carbon • cleantech investors capital allocation more into line with the public good? And economy, recognising the scale of the how does regulation, currently being discussed in the light transformation required. • cleantech entrepreneurs of the financial crisis, relate to broader sustainability issues?
2 Private sector financial institutions should focus • large companies In a speech in early 2009 summarising the findings of the more closely, either individually or in sector UK-government-commissioned Turner Review24, Adair collaborations, on how they can shift their portfolios • disruptive innovators Turner, the chairman of the Financial Services Authority to reflect the long-term interests of their clients (FSA), identified five key issues. The table on the following • investment analysts when current price signals are weak – and how page identifies these issues and their relevance to the wider they explain this strategy to their clients. assessment of social and environmental risk. • pension funds 3 The public sector needs to refocus its efforts on • pension fund consultants the incentives in place to encourage greater investment in the transition to a low-carbon economy, • Carbon Trust including investment in forests. • Carbon Disclosure Project 4 Finance institutions should explore more actively the opportunities arising from investment in • CBI. adaptation.
5 Public and private sectors need to actively pursue models for risk-sharing.
24 The Turner Review: a regulatory response to the global banking crisis, FSA, March 2009 22 14578 FFF Annual report V4 15/6/09 11:55 Page 24
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The Turner Review gives considerable emphasis to key finding of the relevance to wider the importance of analysis that takes account of wider Turner Review sustainability economic trends and intellectual challenge. It also stresses the need for a new FSA approach with a greater focus on systemic issues (such as the interdependence of banks on 1 Financial markets are susceptible Collective responsibility means that people either feel powerless each other for liquidity) and improvements in governance to irrational herd effects, and more liquid to take a different path, or hide behind the inaction of others. markets are not always better. and risk management within firms. All of these will require a wide perspective, taking account of the fundamental risks for the financial sector, and the economy in general, that 2 Securitised credit does create some Securitisation has been used to enable investment in important arise from social and environmental issues – including, specific and inherent risks, but areas, such as microfinance. It can play an important role so long most urgently, from climate change. securitisation25 is here to stay, and can as the underlying assets are (a) properly valued and (b) valuable be made safer by appropriate regulation. to society. Some of the more specific areas in which there have been calls for regulation include: 3 Many important risks cannot be Systemic credit and liquidity risks were not properly modelled in • the separation of retail and investment banking managed by sophisticated maths at the the run-up to the financial crisis. Regulation must also take into firm level, but have to be constrained by account the massive systemic risks arising from climate change • short-selling appropriate regulation. and other social and environmental externalities. • remuneration and bonuses 4 Much financial innovation has been of Much financial innovation has been designed simply to serve the minimal social value. interests of a rich elite. However, financial innovation may be • complex financial instruments needed to enable activities that serve the public good – for • interventions to support key markets example, microfinance investment structures, healthcare, and public-private partnerships around investment in climate change • tax havens. mitigation or adaptation. the separation of retail and investment banking 5 Market discipline, expressed through This clear recognition of the failure of the market shows the need The 1986 ‘big bang’ deregulation of UK financial markets market prices, is ineffective. (For for a fundamental rethink of the way information is generated, opened up new opportunities – but also risks – for retail example, bank credit default swap analysed and acted upon. A much wider perspective on this will banks. In the new integrated investment banking operations spreads and share prices in the run up enable new risks to be understood and managed more effectively. which could be created post-bang, traders were allowed to to the crisis gave strong positive signals use the savings deposits and investments from their retail about the health of the sector.) banking side as part of their capital base for trading activities. And these trading activities could – and did – use
25 This is a technique involving pooling and repackaging assets to create new financial products. 23 14578 FFF Annual report V4 15/6/09 11:55 Page 25
a high degree of ‘leverage’ – that is to say, they typically regulation tending to generate ingenious avoidance tactics remuneration and bonuses relied on a high level of borrowing. US banking institutions rather than genuine compliance. The Turner Review targeted executive remuneration and in particular rushed to take advantage of this trading company bonus structures as a key systemic weakness in environment. Using their (thin) capital base, they increased short-selling markets, where the reward for short-term performance has their exposure to risk through increasingly leveraged trading The practice of short-selling has drawn a great deal of become disconnected from the associated long-term risks. and financial modelling, thereby creating what we can see criticism. A practice which seems to be at odds with The report states that “remuneration policies should be in retrospect as unsustainable imbalances in the system. responsible engagement and ownership of assets by designed to avoid incentives for undue risk-taking; risk When Lehman Brothers failed, for instance, it had a financial institutions, short-selling has become a symbol of management considerations should be closely integrated liabilities to assets ratio of 35:1. the short-term attitude to investment that engulfed the City into remuneration decisions”. Good practice should entail since the big bang. Managers of funds are motivated to paying bonuses into an escrow account, subject to Some take the view that the correction of these flaws will engage in short-selling because they get a performance fee clawback in the event of poor fund performance later require a clear separation of ‘casino banks’ from retail from it. These fees are paid out on an annual basis – on down the line. banks. Turner and others have argued, however, that this is regardless of performance elsewhere in the managed funds. neither straightforward nor likely to resolve the problem. If a stock is very over-valued, it may be legitimate for short The G20 communique agreed in London in early April 2009 sellers to play a role in bringing the price down to a more that there would be a new international set of rules to Many take the view that what is needed is a restatement appropriate level. But in principle better outcomes might be prohibit banks from paying traders and executives large of the primary importance of banks’ relationships with achieved for society as a whole through identifying ways to cash bonuses if they are making risky decisions. Regulators customers, so that a bank is focused on serving its encourage fund managers to find and hold the stocks that will assess how much risk traders are taking, and those customers first, not on serving the interests of shareholders. will contribute to wider sustainability. deemed to be making more risky decisions will only be paid This is a theme developed strongly by Sir Jeremy Morse, in shares which cannot be sold for several years. the former chairman of Lloyds Bank, in a new book short-selling published by the Centre for Financial Innovation.26 Short-selling is a trading strategy designed to gain advantage complex financial instruments from an anticipated fall in the value of a stock. It involves The development of complex financial products, which created From a sustainability perspective, this approach has investment managers, primarily using hedge funds, borrowing such devastation in the financial markets, was due partly to obvious resonance. It shifts the focus from the financial and large quantities of the stock, which they sell vigorously until a time this misalignment of incentives and asymmetric risk. Sellers of speculative economy, where the questions are “How can when its price has fallen appreciably. This then enables them to sub-prime mortgages were motivated to sell mortgages, even we generate the most money out of our existing capital buy the position back at a lower price, to capture the value of when they were aware of the risks of default, because their base?” to the real economy, where the questions are “Who the (downward) movement, and return the borrowed stock. pay was based on a commission on each sale. Dealers in are we lending to? For what? Who has deposited their investment banks were incentivised to package up these sub- savings? How can we best meet their needs?”. The FSA and government authorities blamed short-selling prime mortgages, and sell them on, because their pay was for the rapid deterioration in the price of key banking stocks related to the quantity of instruments sold. As for the rating It also shifts the emphasis towards the quality of service such as Northern Rock and HBOS, the former resulting in agencies, they too had an incentive to rate these instruments, provided to clients, and away from regulation. This may be the bank being nationalised, while HBOS required a rescue since they generated a substantial source of income. no bad thing, given the past experience of financial deal from Lloyds TSB to prevent it from going bust. 26 Grumpy Old Bankers: Wisdom from Crises Past, Centre for the Study of Financial Innovation, March 2009 24
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3. finding solutions: where to focus attention
The proliferation of complex structured products such as interventions to support key markets credits they had previously used as a hedge / offset against collateralised debt obligations (CDOs – see box) eventually Regulation that directly targets personal remuneration may the high price of oil. This selling pressure caused a collapse exposed what the Turner Review would later highlight as create incentives for behaviour change. Regulation that in the price of carbon. One of the adverse effects of this is a systemic failing in credit rating methodologies. With helps to create an effective valuation in the market for reduced investment by polluting companies. Another is a incorrectly rated bonds being exchanged between banks, natural and social capital, and that encourages longer-term slowdown in clean energy projects in developing countries the inherent volatility of these products meant that funds perspectives, will also create incentives around decision- against which firms in industrialised countries can claim could deteriorate in very short time. The fact that they were making on investments. credits under the Clean Development Mechanism – the so widely spread across investment banks created a CDM has observed a 30% drop since mid-January. problem for the whole financial system. The carbon market is the most advanced example of an attempt to create a global price for a public good. It has Part of the weakness in the carbon price comes about Complex financial instruments are of course not in serious flaws, however, that are currently preventing it because investors are simply not confident that the targets themselves inconsistent with sustainability. The difficulty from having the impact needed on carbon emissions. that governments have imposed on their carbon emissions arises from an excessive focus on the instrument without In particular, it has suffered from the knock-on effects (calculated in line with the scientists’ view on the levels that any meaningful reference to the underlying assets, so the of the current failings in financial markets. will prevent dangerous climate change) will translate into actual impact on social and environmental capital is reality. Further interventions are required that provide unclear, and the risk and value is hidden. A historical lack of The price of carbon in the EU Emissions Trading Scheme investors with the solid evidence they need to make transparency around these instruments compounds this. hit just 10 in February 2009. This latest drop resulted from decisions to reduce carbon exposure in their portfolios. € In the future, there will need to be a much greater emphasis power generators and industrial companies cashing in the Many advocate a floor price for carbon, while others have on the way the structure relates to the underlying asset, permits they had previously been allocated (free of charge) promoted the idea of the government issuing bonds linked and on the way in which exposure to these types of under the cap-and-trade scheme. The companies had to emissions targets. instrument is recorded and reported. spotted this as an opportunity to bring in funds. Polluter industries such as steel, concrete and glass have become tax havens collateralised debt obligations increasingly convinced that world demand is set to remain Regulation to clamp down on tax havens has been a key
CDOs are designed to create exposure to a portfolio low for the short-term. Amid projections that CO2 output feature of discussions on global financial sector reform. of corporate debt. Each piece of debt is allocated a will fall in line with this pessimistic economic outlook, they The focus is on transparency, social equity and fairness. credit rating as determined by the three main ratings sold off permits – to create a cheap short-term funding This represents a reaction against a culture of secrecy in agencies (Moody's, Standard & Poor's and Fitch). When option at a time when banks continue to struggle to lend. parts of the financial markets. Barack Obama is leading the aggregated they form a portfolio of risk, which is held march against tax havens, arguing that they unfairly benefit off-balance-sheet, adding to the overall lack of Financial speculators such as hedge funds have also taken certain companies and rich individuals. Other leaders transparency. A fund manager sells slices, or tranches, advantage of the weak regulatory influence in the fledgling have picked up the theme. Regulations that lead to of this portfolio of risk as corporate bonds, each with ETS market to generate short-term gains. As the price of greater transparency may deliver information that could their own credit rating. carbon falls, hedge funds have been selling the carbon result in a more effective clamp-down.
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In summary, the current general mood of criticism and The Network for Sustainable Financial Markets The Global Finance Initiative has produced a report 28 anger against the financial sector means that there are currently has working groups operating in the describing the global public policy finance system and significantly increased opportunities for regulation, as well following areas: highlighting the scale of transformation required to address as pressing needs for it. And these reforms can be very • Executive compensation – to design and promulgate its weaknesses. It has proposed that a World Commission positive, if regulators are mindful of sustainability objectives compensation and remuneration arrangements in the on Global Finance be set up to take action. – alongside their desire to avoid future disasters and to financial sector that have a longer-horizon approach to https://sites.google.com/a/gan-net.net/gfi-share-space satisfy angry voters. However, to be successful, regulation the balancing of reward and properly-specified risk. will also need to be accompanied by a change in culture. WWF has established a programme – the Finance Lab – to It is a matter of ensuring that certain practices are viewed • Climate change – to develop an analysis showing how look at how the finance sector could be transformed, and not only as more or less legal, but also as more or less pension fund and other long-term investors can meet particularly the behaviour changes that will be needed to socially acceptable. future plan liabilities through investment in carbon- underpin fundamental changes to the system. The first neutral energy infrastructure. phase of the Finance Lab will involve convening groups And a further fundamental question is whether the scale of to explore scenarios for the future of finance. the problem is such that a global solution is needed, rather • A White Paper on regulatory reform – to take a broad www.wwf.org.uk/what_we_do/changing_the_way_we_live/ than piecemeal regulation on a domestic basis. approach to evaluating the problems that underlie the finance current market crisis, and to propose a range of reform measures.
highlighting important initiatives www.sustainablefinancialmarkets.net The Network for Sustainable Financial Markets is an international non-partisan network of financial sector The Centre for the Study of Financial Innovation provides professionals, academics and others, who are currently a useful forum for active discussion of the financial markets, participating in a series of working groups. Their aim is to including what went wrong and how the problems can be reform the financial markets system for the creation of addressed. Its recent publication Grumpy Old Bankers: long-term sustainable value. Wisdom from Crises Past 27 provides interesting perspectives. www.csfi.org.uk Recent consultation papers by the Network include one on pension fund fiduciary duties, and one addressing sell-side The Institute for Public Policy Research (IPPR) and conflicts. The former, recognising the size and importance Tomorrow’s Company are running a joint programme of of pension fund investors in today’s markets, proposes events to explore some of the regulation and wider policy necessary reforms to the fiduciary duties of pension fund that may need to be put in place for the financial markets. trustees. The latter analyses various types of conflicts of www.ippr.org interest for sell-side analysts, and again makes appropriate www.tomorrowscompany.com reform proposals. 27 Grumpy Old Bankers: Wisdom from Crises Past, Centre for the Study of Financial Innovation, March 2009 28 GFI Final Report and Call for World Commission on Global Finance, The Global Finance Initiative, March 2009 26 14578 FFF Annual report V4 15/6/09 11:55 Page 28
3. finding solutions: where to focus attention
recommendations developing these recommendations will require 3.5 new models of sustainable collaborative input from: Many experts worldwide are currently focusing on the growth fallout from the financial crisis and the regulation • regulators such as the FSA All of the evidence shows that it will simply not be possible that needs to be put in place to reduce the risk of it • government to grow in the future in the same way as we have done happening again. Much of this thinking requires detailed over the last century. If global growth and consumption technical expertise. But there needs to be a parallel • ‘Grumpy Old Bankers’29 continued at the same rate and with the same resource dialogue – one that asks questions about how any • existing CEOs of financial institutions efficiency, by the mid-2030s we would need the equivalent regulatory reform will help to address the social and of two planets to maintain our lifestyles. environmental problems that could underpin the • think-tanks such as the Centre for the Study of next great crisis. Financial Innovation and Tomorrow’s Company Some of that pressure comes from an increasing population • progressive practitioners such as members of the – expected to grow from around 6.5 billion today to around Regulation should be designed to: Network for Sustainable Financial Markets nine billion by mid-century. The first challenge is therefore ensure that systemic risk can be accounted for to make economic growth more efficient. Traditional growth 1 • NGOs. and managed; requires increasing material and energy use, causing a decrease in environmental quality. The challenge is to find 2 incentivise a longer-term perspective on investment; ways to satisfy needs, provide mobility and generate wealth using a fraction of the resources we do today through 3 address incentive structures so that the focus of making consumption and production more sustainable. financial innovation is not simply on avoiding This is variously referred to as ‘eco-efficiency’, ‘resource regulation; productivity’ or ‘smart growth’. It involves 'decoupling' growth from increased resource use. 4 lead to improved methods of risk assessment and valuation techniques; and One of the most articulate and persuasive proponents of this approach is Amory Lovins of the Rocky Mountain 5 shift the emphasis onto sustainable patterns Institute, who argues that using resources more of growth. productively can create wealth, encouraging new industries, products, and economic activity. But there is a debate about whether resource efficiency can deliver the absolute reductions in resource use that we need, rather than just bringing relative improvements.
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So-called rebound and displacement effects may mean that opportunities for better education and healthcare. And in quality of life and even mortality rates, it becomes humankind continues to consume ever more. For example, these cases, wellbeing may often be enhanced by increases increasingly evident that we have very inadequate tools for over the last two decades our domestic electrical in personal wealth. Some of the pressures on resources measuring real progress. appliances have become much more efficient in energy and the rises in carbon emissions result from citizens in use, but at the same time we all own many more of them. developing countries pulling themselves out of poverty. One of the big unanswered questions is whether capitalism As we reach and exceed natural environmental limits, the can exist without continual growth. Clearly a lack of growth – So decoupling would have to take place on a massive distribution of scarce resources becomes an increasingly as we are experiencing in the current recession – is not in itself scale. Professor Tim Jackson calculates that: “In a world fundamental question. But we should be careful about a good thing. But is growth of one kind or another an intrinsic of nine billion people, all aspiring to a level of income assuming that economic growth, narrowly-defined, is a part of the capitalist system? Tim Jackson concludes that commensurate with 2% growth on the average EU income good indicator of increased wellbeing even in the poorest today, carbon intensities (for example) would have to fall countries. The mantra of increased economic growth has “There is no clear model for achieving economic stability on average by over 11% per year to stabilise the climate, historically been used as an argument for some of the worst without consumption growth. Nor do any of the existing 16 times faster than it has done since 1990. By 2050, examples of human rights abuses. Communities have often models account fully for the dependency of the macro- the global carbon intensity would need to be… almost 130 been removed from their land in the interests of economic economy on ecological variables such as resources and times lower than it is today.”30 growth that provides them with little benefit and instead emissions. In short there is no macroeconomics for increases the resources available to elites. sustainability and there is an urgent need for one.” If 'decoupling' is not able to deliver the radical changes that are needed to prevent ecological crisis, will we have to The poorest also suffer most from the increased pressure on The Sustainable Development Commission proposes 12 accept a slow-down of growth itself and a total rethinking resources and increased carbon emissions. They are the steps to a sustainable economy in their report Prosperity of how we define prosperity? The recent Prosperity Without most vulnerable to food price increases caused by scarcity Without Growth.32 To build a more sustainable economy, Growth? report31 from the Sustainable Development of land, depleted soil or the changing climate. They are the report advocates developing macroeconomic Commission (SDC), an independent advisor to the UK the most exposed to weather shocks caused by climate capability, investing in jobs, assets and infrastructures; government, argues that the policy of ‘growth change as they are more likely to be dependent on increasing financial and fiscal prudence; and improving at all costs’ should be abandoned in favour of a more agriculture for their livelihoods; they tend to live in the most macroeconomic accounting. To build capabilities for sustainable system. affected regions; and they have few resources to fall flourishing, the report talks about sharing the work and back on. Economic growth in the rest of the world can improving the work-life balance; tackling systemic The social and psychological benefits of moving to a new create even worse outcomes than simply being ‘left behind’. inequality; measuring prosperity; strengthening human and conception of growth are well articulated by authors such social capital; and reversing the culture of consumerism. as Professor Richard Layard or the think tank nef. Their Consumer demand in richer countries has certainly work shows that economic growth narrowly defined does provided jobs to people in the developing world. not correlate with wellbeing and happiness. Employment by factories in China, supplying consumers in the richer countries, has undoubtedly increased incomes 30 Prosperity Without Growth? The transition to a sustainable economy, Sustainable Development Of course, for many who are currently living in poverty, and contributed to poverty alleviation. But, with water Commission, March 2009 31 Prosperity Without Growth? – Background, Sustainable Development Commission, March 2009 increased consumption means sufficient food, better shelter, shortages, pollution and depleted biodiversity affecting the 32 Prosperity Without Growth? The transition to a sustainable economy, Sustainable Development Commission, March 2009 28 14578 FFF Annual report V4 15/6/09 11:55 Page 30
3. finding solutions: where to focus attention
In terms of respecting ecological limits, the report by shareholders who are disconnected from the impacts of while progressively reducing ecological impacts and recommends imposing clearly defined resource and a company’s activities, it is more likely that natural and resource intensity throughout the life-cycle to a level at emissions caps; fiscal reform for sustainability; and social capital will be depleted in order to increase financial least in line with the Earth’s estimated carrying capacity. promoting technology transfer and ecosystem protection. capital. Once again we return to the need to address the www.wbcsd.org It is a wide-ranging agenda that highlights the interlinked issues of incentives, valuation techniques, and interconnectedness of economic, social and environmental management of long-term systemic risk. The centre for wellbeing at nef (the new economics goals and emphasises the inadequacy of the one-track foundation) aims to enhance individual and collective wellbeing growth model. in ways that are environmentally sustainable and socially just. highlighting important initiatives The aim is to promote the concept of wellbeing as a legitimate But what will such new attitudes towards growth mean for The Global Footprint Network uses the concept of and useful aim of policy, and to provide individuals, companies and their business models? The gains from ‘ecological footprint’, a resource accounting tool that communities and organisations with the understanding eco-efficiency are well known. But sustainable production measures how much nature we have, how much we use and tools to redefine wealth in terms of wellbeing. and consumption will require radical changes to business and who uses what. This helps measure humanity’s www.neweconomics.org models and consumer behaviour, all underpinned by demand on nature. It measures how much land and water government frameworks that enable the transition. Forum area a human population requires to produce the resources recommendations has worked with one of its corporate partners, Sainsbury’s, it consumes and to absorb its wastes, using prevailing 1 Urgent attention needs to be brought to the to identify business models that can promote sustainable technology. By making ecological limits central to decision- macroeconomics of growth, to assess the scope consumption. From this work, we have created a database making, Global Footprint Network wants to end what it calls for a different approach. illustrating how new models of sustainable growth are ‘overshoot’ and create a society where all people can live achievable and, in some cases, already happening. well, within the means of one planet. 2 Finance sector institutions need to focus on the www.footprintnetwork.org sustainability of their model, which requires But in order to increase in scale, many of these models continuous growth to service credit. require changes in policy or regulation, so that the The Rocky Mountain Institute (RMI) is an independent companies who are adding to smart growth get rewarded -– think tank with the mission to drive the efficient and developing these recommendations will require and those adding to traditional growth are penalised. restorative use of resources. RMI is engaged in cutting- collaborative input from: Investors must play a role in the allocation of capital, too. edge research on oil independence, renewable energy • SDC technologies, distributed energy, resource planning, • governments Some corporate structures are better suited to delivering green buildings and radically efficient transportation. sustainable growth than others. A cooperative organisation, www.rmi.org • financial institutions established to deliver value for its members (who are also • economists customers and local communities), is naturally much more The World Business Council for Sustainable Development inclined to ensure that its activities are in the best interests (WBCSD) has worked on how to create eco-efficiency – in • think-tanks and academics of its local community and the environment, since it is other words, how to deliver competitively priced goods and • the initiatives outlined above. connected closely to these outcomes. Where ownership is services that satisfy human needs and bring quality of life, 29 14578 FFF Annual report V4 15/6/09 11:55 Page 31
conclusion
In this paper, we have attempted to explore some of the key areas where financial markets and economics need to be rethought. There are no easy answers. However, at this time when the financial crisis has shown that ‘business as usual’ is no longer an option, we have a unique opportunity to apply the combined brainpower of the financial sector, the wider corporate sector, academics, NGOs and government to achieve a more sustainable system. We have to seize this chance.
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