The financial sector is growing with recent estimates projecting close to USD 150 trillion by 2025. Individual financial companies – banks and non-banking financial companies are doing extremely well, even during the pandemic, average profit levels were in double figures. And the fortunes of billionaires and the leaders of financial institutions- who are mainly white men – have correspondingly been buoyant and healthy.
However, if we are concerned with the well-being of the world’s majority, we cannot be sanguine about whether the growth of the financial sector is positive. Growth in financial assets under management is only a first step in the efforts to transform the finance and investment sector. A thriving financial sector is out of step with concerns that include obscene levels of wealth and income inequality, learning losses for young people and vaccine distribution inequity. There is a significant disconnect between how the wealthy elite and most of the world experienced two years of dislocation, loss of life, and disruption. This shows up very starkly in the finance world.
In the US, changing labor market trends dubbed the Great Resignation and demands for improvements in wages, salaries and benefits are evidence of things being shaken up. But viewing this from a US-centric lens is not particularly helpful as in most of the OECD, the social system provides much more generous workplace benefits than in the United States.
From a global economic system point of view, post-COVID trends that are likely to be of wide concern include: the implications for the globalization of manufacturing, as nations aim to move away from having China and Asia as the factory of the world; recovery of travel, tourism and leisure industries; the effects on consumer behavior with respect to food and agriculture; and investments in health systems.
As part of COP 26 hosted in Glasgow, the finance and investment system made a bold claim that its leadership could be more effective and speed up response to climate change. To put this vision into action, an alliance - the Glasgow Financial Alliance for Net Zero (GFANZ) was formed and launched with great fanfare, declaring that big money managers were interested in working with governments and international financial institutions to address the climate crisis. There have been few details post-launch, but it is still early days and the criticism has been fierce.
Larry Fink, the head of BlackRock, in his annual letter confirming his adherence to capitalism and eschewing “woke” politics in the US, sent a loud message that his behemoth would be interested in and betting on decarbonization efforts.
In summary, the global financial sector is growing amidst disruption and restructuring in the real economy. There are no clear signals as to where this will settle and very little leadership that takes multiple and often conflicting interests into account. There are some encouraging signs to rethink what is meant by fiduciary duties.
In this context, we suggest a three-fold agenda as a fulcrum for change of the finance and investment sector. This goes beyond celebrating increases in size and taking action to address structural and processual bottlenecks, blind spots and the need for different investment strategies, including redefined blended finance.
Pillar One - Stand up facilities that address major system wide challenges (climate mitigation, adaptation, infrastructure gaps including for social infrastructure). Use structuring that delivers rewards that are proportionate to risks and incorporate designs that focus on mobilizing and deploying multiple forms of capital.
Pillar Two - Address, through multiyear long-term programs, the need to decentralize pools of financial capital by having financial ecosystem strengthening programs around the world. We have lots of trapped and underutilized financial capital being deployed in uneconomic and damaging ways because of capability gaps and backward regulatory policy frameworks.
Pillar Three - Design and deploy education, information and awareness raising, including in formal education at all levels, to facilitate critical thinking about systems change including challenging late-stage capitalism.
To move this agenda forward, I will share examples of good practice that I have observed and been engaged with. For Pillar One, examples of these facilities include the partnership between the IFC and Allianz to create the world’s first cross-sectoral portfolio of emerging-market loans aligned with the Paris Agreement. Generate Capital is a holding company structure that provides patient capital including to deep tech ventures. There are also public finance initiatives including those through the Green Climate Fund. An exciting development are the SDG Bonds being spearheaded by developing countries, including a significant issuance by Mexico.
Taking an ecosystems approach, Pillar Two is relevant in advanced capital markets as well as in ones that are still evolving. The US racial wealth gap has attracted considerable attention in the last few years, with no less than the Federal Reserve System mounting a comprehensive series to address racism in domains ranging from entrepreneurship to education and higher education. US companies have authored pledges, blueprints and frameworks that pledge undertaking steps to combat structural racism in the US. As indicated by assessment studies, only some of these pledges have been accompanied by actual capital deployment.
Black, Asian and Latinx led Fund managers in the US have been able to attract financial capital and stand-up facilities, including those that focus on reducing the racial wealth gap and providing dedicated support for historically marginalized and excluded communities. Most recent of those is Known Holdings. Multimillion raises by new VCs led by Black professionals have been celebrated with the positive trend that some of these, such as the Brown Venture Group, are not on the coasts.
In my recent essay on mobilizing sustainable finance, I encouraged decision makers to place much more attention on increasing the quantum of climate finance especially for the developing world where finance has stalled and is mostly deployed as debt. It is also important that we strengthen financial ecosystems around the world, drawing on the credibility and knowledge of the Principles for Responsible Investment (PRI). In addition to capability building, it is necessary to make changes so that appropriate policy and regulatory frameworks can be built. This is not a developing country issue only, because financial systems in the US and UK face many non-technical challenges and, in these countries, there is an urgent need to address the serious racial and diversity challenges.
Outside of the US, a particularly good example of the type of intermediaries that should be encouraged is ScaleUpAfrica led by Amma Gyampo. Their approach focuses on providing women and youth-led ventures with research based, practical solutions including providing technical skills. ScaleUp Africa leverages the social capital of their founder and actively partners with knowledge producers and development organizations. It is a great example of an intermediary that benefits a wide ecosystem.
The urgent need for action was crystallized when none other than the UN Secretary General has made a robust call for radical reorganization of the global financial system because of its failures to respond to the shock of the pandemic, the shortfalls in climate finance and the systemic problems in fair credit risk assessments for developing countries.
Around the world civil society organizations, such as The Green Economy Coalition, As You Sow, American Sustainable Business Council and The Global Council on Science & Environment, have been hard at work on changing the narratives – Pillar Three. From a formal education point of view, there are several sustainability aware MBA programs including at the University of Vermont, Duke University and Cambridge University to name a few.
Business Roundtable, the World Economic Forum and Business as an Agent of World Benefit are all very visible and active in presenting a narrative of capitalism that works, whether it is by promoting ideas around positive business, stakeholder capitalism or responsible business. But very little of their thought leadership proceeds with mutual respect for the global South or acknowledgement of the historic harms of capitalism and with cognitive justice as a core principle.
As part of moving forward, it would be important for academics and thought leaders to move beyond producing endless varieties of classification systems and historic reviews of the field that are partial and dominated by an uncritical reading of late-stage capitalism. Given the acute level of the climate and other crises, I admit to being impatient with academics who are content to write review articles that may accurately present classification systems or offer yet another rubric but little (or very limited) policy relevance.
There is a serious and interacting dysfunction in the global financial & investment sector that threatens lives and livelihoods. We therefore call on influential academics, particularly those who enjoy visibility, to use their considerable resources and access to move the knowledge frontier forward.
Progressive thinkers and doers are at a disadvantage in terms of money to invest in narrative change, but have a significant advantage as far as centering the ethical basis of their work and vibrancy.
From an instrumentalist point of view, there is evidence that the dream of overconsumption fueled by techno optimism is not inspiring the younger generations, even in the wealthy world. And so when these young folks inherit wealth, they will ask more of their financial advisors. Of course, the myths of technology as savior have never really been believed by the global Majority. Resistance, solidarity movements, disruption and solution design must become even more the order of the day.
We must rethink systems, as without fundamental restructuring, no amount of money will contribute to producing a positive response to the crises we face. This is an issue facing society as a whole…
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