How Finance Needs to Change in Response to the Climate Emergency

How have we gotten here?

A financial system, which brings together ambitious government budgets, well-funded regional, national and local public and development banks, private banks and other financial actors, is purposed to serve society. This system can be a powerful tool to help implement a vision for our economies and societies. 

But over the last thirty to forty years, governments and parliaments around the world shifted a big portion of activities and services from the public to the private sphere. They reduced taxes on the rich, and they did not create strong rules and restrictions for financial markets and actors, to ensure that their loans and investments would not result in societal issues such as climate change. These actors were liberated to introduce new ways of working that could increase profits for the finance sector. 

Instead of meeting needs in the best way for society, the financial system started to take the way that made most money for itself. The financial markets began to exist basically to serve themselves. They are now being largely used for speculative trading (that has very little social value), for the buying and selling, splicing and dicing of existing assets (such as bonds, stocks and real estate), rather than investing in productive projects.2 These activities are risky and they don’t address society’s urgent issues. They only make rich speculators even richer, and this inequality matters. A growing pie doesn’t help most people if only a few get all the extra pie.

This shift of wealth is also a shift of power, with governments and parliaments becoming de facto obedient to financial markets. National sovereign debts have soared, and our governments have become tools of corporations and banks, prioritising the interests of the wealthy rather than giving equal weight to the needs of everyone. The financial sector uses its wealth, power and influence to lobby against progressive measures that could hold it better in check, and direct investments where we need them to go. 

It is no wonder then that it continues to recklessly plough money into fossil fuels, which generate profits in the short-term. Many major banks and some public finance institutions have even increased their stakes in these damaging investments after the Paris Climate Conference.3 Enormous financial resources, largely funded by the pensions, insurance and other savings of normal citizens, are still directed towards industries that are actively harming the planet. This business model is driving the climate crisis, and the scary thing is, the true extent to which financial institutions are on the hook for fossil fuels remains hidden.

What’s the alternative?

Finance actively structures the opportunities in our economy and society. It should be given a strong direction: to direct investment, credit and liquidity to projects which serve society and help us make the transition to living within our planet’s limits.

This is a key step to reprogramme our economy so that it works in the interests of all rather than just in the interest of corporate elites. 

The economy has been intentionally designed—and can be redesigned — through policy decisions and new legally binding laws. We need our lawmakers to take control of the financial system. Governments and parliamentarians must regulate immediately to move the financial industry  towards a stable, sustainable way of doing business and away from short-term recklessness, to avoid an ever-worsening climate crisis. The EU has already shown that such law making is possible, but these initiatives will not sufficiently shift the flow of money. 

We need new rules to curb the power of the financial lobby, to allow citizens’ voices and the public interest to take priority through a more open democracy.  We need to make financial actors transparent about how much finance is actually tied in to carbon intensive investments, and redirect power back to our communities. A key element of that will be making sure that finance is responsible, acts on what matters and focuses on the long-term. 

We need the finance sector on our side: By introducing incentives, quotas, bans and obligations, we can get finance to energise new projects and new ways of thinking and doing. We need it to urgently put the money where it needs to go: to projects, both large and small, that are socially productive and will help humans live as part of and in balance with the rest of life on this planet.

We demand the immediate prioritisation of investment in our shared future: away from fossil fuels and towards a just transition. Through a global Green New Deal, we must reach a fair, new settlement that delivers and serves the needs of everyone. This new settlement must especially support those on climate frontlines, whose livelihoods will be affected by a much-needed just transition from carbon-intensive industries. 

At the moment, many banks, insurers and pension funds rely on financial assets that are often backed by fossil fuels. As the transition to a low-carbon economy happens, there is a high possibility that the value of these “stranded” assets in investment funds and pensions will diminish or become zero, affecting millions of people´s retirement plans. Governments need to make sure that steps are taken to protect people from these impacts: Fossil fuel companies, big banks and speculative investors should carry the costs of their recklessness, with safety nets put in place to protect ordinary people.