Transforming the financial sector to work for people rather than profit alone

Achieving a green economy involves tackling a number of different global challenges including climate change, ecosystems, waste, water, equity and social inclusion. A green economy will require radical change to the way capital is managed around the world. Therefore, the finance sector, which manages this capital, is at the heart of achieving any meaningful change.

The flows of capital around the world are intended to allow society to meet its needs and to allocate resources according to (economic) need. Alongside, this 'core' role the finance sector has increasingly developed a business around managing the finance sector itself and has been seen to make large profits from this – it has also caused one of the largest global economic downturns ever seen.

However, finance for finance sake aside, to achieve a green economy, one could argue that the finance sector is just a tool to be used in implementing the objectives of such an economy.

With the correct measurement (prices), transparency and governance in place the finance sector will innovate and create new business models around this new economy and thrive as usual.

The challenge is of course how to go from where we are today to this new green economy when the global system is now so interlinked and interdependent that changing small parts of the system in the hope that this will lead to global change very rarely works.

Some interesting new finance models have been developed that tackle various issues under the green economy. In particular micro-finance has been used to address issues around exclusion from the economy and therefore tackle poverty. However, these innovations have not reached any meaningful scale.

The scale of the challenge can be illustrated through one issue facing the green economy – namely climate change. The International Energy Agency estimate that US$270 trillion will be invested into energy supply and use under a business as usual scenario between 2007 and 2050. To avoid dangerous climate change (and meet the commitments made under the UNFCCC process) this increases by $46 trillion (17%), or approximately £1 trillion per annum. Therefore, just in the area of climate change, the challenge is a US$316 trillion challenge. Over the past three years, annual investments in low-carbon energy technologies averaged approximately US$165 billion.

Institutional investors including insurance companies, mutual funds, pension funds, sovereign wealth funds, investment banks and hedge funds, through the allocation of capital, can strongly influence the global response to climate change. Their wide range of interests and diversified portfolios extend across a variety of assets, companies, sectors, markets and regions. The common characteristic of these investors is that they have the capacity to pool large sums of money for investment. As an indication of their market share, the pension fund sector alone has assets worth more than US$12 trillion (£7.8 trillion). However, these institutional investors are by far the largest investors into ‘business as usual’.

Key to understanding and scaling up new finance solutions, such as climate friendly investing or micro-finance, is transparency and measurement. If the fundamental measurement system we use is wrong, then the finance sector cannot achieve the results we desire. We can help to kick start the process by managing some of the short term risks around investing in solutions – using public finance mechanisms or public-private partnerships to encourage investment into green economy solutions (managing some of the risks associated with investing in developing countries or new renewable technologies for example).

However, if national governments are unwilling, or unable, to cooperate on a global stage to create a global industrial policy that will deliver a green economy, then they need to put in place measurement systems that price resources adequately and create open markets that will allow global trade to share these resources equitably. The finance sector then needs to be as transparent as possible in the way it incorporates these prices and measurements in its business and in the end it will continue to be a vital part of the global economy allowing the movement of people, resources and processes around the world in a fluid and efficient manner.