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The case for mark-to-planet finance

Oct 10,2019 - Last updated at Oct 10,2019

PARIS — At times, it can feel as if the superstructure of today’s global financial system has always existed and always will. Yet we tend to forget that the current set-up, let us call it the Neoliberal Paradigm, did not come down to us on stone tablets from heaven, but was developed over time by a contingent process of intellectual innovation and shifting power dynamics and political constraints.

In the nineteenth century, companies and financiers focused almost exclusively on returns, exploiting the planet as they expanded across the globe. In the 20th, investors became better, or at least more explicit, in assessing the risk associated with different levels of return, and the financial system became much more sophisticated as a result. Today, with climate and sustainability issues moving to centre stage, global finance must fully embed impact and sustainability criteria alongside the core elements of risk and return.

From now on, all financial models should include all of these factors. This will have far-reaching implications and will require us to change our mental models, too. Instead of continuing to rely solely on long-established mark-to-market accounting rules, we should adopt a mark-to-planet approach that links the global economy and financial system to the needs of the Earth and people.

In undertaking this shift, we need to build on the impetus for systemic change that arose in the aftermath of the 2008 global financial crisis, but which now risks running out of steam. We must think much harder about how we use finance to achieve the returns we need. In particular, we must try to ensure that it becomes standard practice to try to maximise both financial returns and sustainable outcomes.

This will not be easy for two main reasons. First, heightened public anxiety and mistrust could lead to a more widespread “risk-off” stance among investors. This nervousness stems from several factors, including the continuing emergence of the BRICS (Brazil, Russia, India, China and South Africa), rising trade tensions and the possible impact of rapid technological advances on jobs. A host of recent controversies, including the “dieselgate” scandal in the car industry and numerous disclosures via WikiLeaks, have added to the general mistrust. And although the global financial crisis can sometimes feel like a distant memory, the public’s propensity to distrust the financial system is as strong as ever.

Second, interest rates in several developed economies are likely to remain at or near zero for the foreseeable future. With the global value of negative-yielding bonds having recently exceeded $13 trillion for the first time, investors and companies may well need to incorporate a long-term, zero-interest-rate perspective into their financial and business models. Such a “hard reset” has not really happened yet, but should be part of a fundamental reassessment of the global financial framework.

In order to move to a mark-to-planet system, we need to form a common view on what is critical for our future and clearly assess the impact that we want to achieve. Agreeing on this at the outset will lead to better alignment between our core values and the way we use finance. And as we fully incorporate the impact variable into our financial models and change our mindset, this new integrated approach to finance will gradually become second nature.

In this new world, investors and companies will want clear, credible and measurable sustainable outcomes, in addition to financial returns. By defining these outcomes precisely and protecting them from manipulation, we can help to build a firm foundation for modelling and reporting on impact. Far from being mutually exclusive, profitability and sustainability can work in tandem and produce much better results for everyone.

While preserving capitalism’s many benefits, we must also recognise and address its shortcomings in today’s environment. This calls for a delicate, pragmatic balance between allowing free markets to push boundaries and ensuring that the regulatory framework moves the financial system in the right direction.

As part of this process, we should revisit Milton Friedman’s famous assertion that a company’s sole purpose is to generate profit for its shareholders. Perhaps, as Colin Mayer of Oxford’s Saïd Business School proposes, a firm’s purpose should instead be to find profitable solutions to challenges facing the planet. Profit must be a means to an end, and not an end in itself. This change will take time, and require different types of leadership and management at all levels of an organisation.

Hardwiring sustainability into the global financial system will not be a linear process, and there will inevitably be setbacks. We must therefore energise and support those who are pioneering such efforts, and nurture them through these early, uncertain stages.

If we do not approach this task in the right way and with real purpose, then the next financial crisis may kill off any hope of a mark-to-planet world. Given the stark social and environmental crises we face today, that would be a calamity.

 

Bertrand Badré, a former Managing Director of the World Bank, is CEO of Blue like an Orange Sustainable Capital and the author of “Can Finance Save the World?”  Amer Baig is a partner and founder of Blue like an Orange Sustainable Capital. ©Project Syndicate, 2016. www.project-syndicate.org

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