Reforming Financial Systems
We know that the current financial system is the biggest blocker to achieving greener, fairer economies. The Coalition is leading a global campaign for the reform of the financial markets.
“Our financial systems are no longer fit for purpose. Thankfully, a quiet revolution is underway. ”
Financial markets should be the life blood of economies. They can help new businesses grow and can spread the risk of investment. They can drive finance towards poorer countries and regions. They can help citizens save for retirement, buy land or homes, invest in their children.
But today's financial markets are not doing this. The majority of trading on Wall Street happens between funds, little reaches real firms. Money is being concentrated in a few 'too-big-to-fail' institutions, making economies vulnerable to financial crises. To compound the issue, investors are blind to the risks that are building as nature starts to struggle. Yet, reporting cycles are getting shorter, not longer.
It is people who pay the price. 120 million more people are living on less than US$2 a day because of the financial crisis.
“Changes to the physical environment driven by climate change, and society's response to these changes, could potentially strand entire regions and global industries within a short time-frame”
The reward for financial reform is more stable and resilient economies. Ones that are alert to environmental and societal risks, and less prone to boom-bust cycles which hit the poorest the hardest. Ones that are rooted in the real economy, and leverage long term capital for companies to grow and employ people. Mounting evidence shows that lengthening investment cycles could combat secular stagnation in western markets.
Reform of the financial markets is well underway and is coming from unexpected corners of the globe. China has adopted a structural reform programme to green its financial system. Brazil's central bank has introduced requirements for all banks to establish socio-environmental risk systems. Some of the world's largest sovereign wealth funds are divesting from coal.
Our members see that prices need to reflect their full societal or environmental values. Putting a price on polluting activities, such as emitting carbon or contaminating water, helps to send the right signals to the financial markets of the value of our most precious societal and natural assets. (Read how Canada’s carbon tax is working).
But we also know that prices and disclosure alone will not be sufficient. Systemic change starts with central banks and monetary policy. Central banks have a mandate to support financial stability. By leading the way with stress testing and screening investment portfolios against environmental and social risks, central banks can show commercial banks the risks on the horizon. They can also take positive steps by shifting the capital and liquidity requirements for assets that will be good for nature and people.
We know that financial markets need to be diversified beyond institutions ‘too big to fail’. Smaller, community based banks have proved more resilient to financial shocks than their larger counterparts. They are also the ones that are investing in local economies.