Financial system change

Transforming capitalism to make it fit 

for a sustainable future

 

Beth Knight, Head of Corporate Sustainability for EMEIA Financial Services

 

Our modern system of capitalism is no longer fit for purpose. Faced with a growing series of economic, social and environmental challenges the time has come to reboot the way capitalism is conducted and to recalibrate the way we value resources, people and the services they provide.

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One hundred and fifty years after 19th century thinkers coined the term capitalism, this free market system of private investment and ownership in the pursuit of economic growth has more than proven its worth.  It has made nations great, turned fledging companies into corporate powerhouses and delivered social development and an unprecedented standard of living to millions of people all over the world.

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Yet these achievements have come at a high cost for the planet we inhabit and at a rate that threatens the physical wellbeing of many more millions of its inhabitants. At the same time, despite facilitating the growth of a global middle class, capitalism has exacerbated the divide between very rich and very poor — a phenomenon that is only increasing. Today, industries and economies are being shaken up by technological change, the world’s population is consuming more natural resources and they are rushing to settle in cities at a faster rate than ever before.

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Increasingly, as United Nations (UN) Secretary General Ban Ki-moon has described it, our economic mindset and models look like “a global suicide pact,” adding: “We mined our way to growth. We burned our way to prosperity. We believe in consumption without consequences.”

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Traditional capitalism proved itself incredibly successful at delivering growth in an age of abundant land, natural resources and biodiversity. That age is over.

We need to shift the debate from traditional change approaches, which risk leaving problematic system dynamics untouched, 

to bold and innovative strategies.

Such strategies would significantly shift our capitalist model towards a more resilient, equitable and sustainable economic order. 

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In short, we need to create nothing less than a new, sustainable form of capitalism that accurately values opportunities and risks in a global economy that is being reshaped by a changing climate, finite natural resources, dwindling biodiversity and an increasingly urbanized and connected population.

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What will be the driver of this bold, innovative form of capitalism? The answer lies with our financial system.  Yes, the same financial system that is seen by many as the cause of inequality, unsustainable growth and a myopic focus on short-term profit while ignoring long-term stewardship of society and planet.

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The financial system is a fundamental component of capitalism. By managing large pools of capital and assets, the industry has the ability to shift economies onto a more sustainable footing. Some financial institutions already are working to improve their transparency, simplify their products and increasingly engage with their stakeholders. When investing and advising on capital expenditure, some are starting to review their investment to ensure that environmental and social risks are managed properly. For example, Citigroup holds annual events for investors to discuss equity research and financing challenges related to climate change and water. JPMorgan Chase and BNY Mellon each hold meetings with investors on relevant sustainability issues including climate change, consumer lending and business ethics. Regulation and industry standards are slowly gaining pace to accelerate this change. Yet this is just a start.

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As a global society, we need the financial system to reassess how it judges and rewards business success; it needs to revalue companies and entire industries based on a world of finite resources and it needs to replace its own much-maligned culture with a new value system based on transparency, integrity and trust.

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Here is how financial system change will deliver capitalism fit for this century and beyond.

 

This paper was originally published as a submission to the Robin Cosgrove Prize in Ethics in Finance 2015.  http://www.ey.com/Publication/vwLUAssets/EY-Financial-system-change/$FILE/EY-Financial-system-change.pdf