There is no one definition of what of Sustainable Finance
is, but the one that resonates with me is: -
“The
act of allocating capital to individuals and businesses that want to make
productive use out of it. In short, finance creates social value. The practice
of creating economic and social value through financial models, products and
markets that are sustainable over time.”
(You will note that there is no mention
of environmental sustainability, it is about creating a new method of doing
finance.)
I have become very interested in the concept of sustainable
finance over the last year and I have decided to write about it in Sustainable
Inc. I suppose there is no real surprise why this has become a area of interest,
the bankers controlling liquidity and managing the financial system have so
spectacularly come unstuck in the last five years, with scandal after scandal,
rigging, greed and miss selling. But, before I continue I want to make a few things
clear, I have a quite a few friends who have been involved in the financial industry
and I am not leveraging this criticism at individuals but at the industry as a
whole, its culture if you like, and the lose of its social contract. The books
Boomerang and The Big Short by Michael Lewis, the American finance writer so
eloquently lay this out for all too see and yes I do recommend reading them.
The financial industry over the last thirty years has
developed into an industry that controls the allocation of finance for its own
gain, having quickly released that if they hold funds within financial system
and trade on the various markets, such as bonds, derivatives etc. they could
create wealth and profits for themselves (very
simplified but you get the picture). As a business they are entitled to
make profits like any other enterprise. But, it forgot its main function, the
allocation of resources to enterprise to produce good and services and to
supply their customers with credit and interest. The finance sector developed
monopolistic traits, i.e. less banks operating, higher fees and restrictions on
liquidity, yet profits went up, and industries suffering. Effectively, the
financial sector become self- serving and lost the trust of the general public
and its social contract. An example of this is in the UK with the establishment
of the Parliamentary Commission on Banking Standards and its
reported proceedings. Couple this with the increase in operational risk
issues and the continuation of heavy losses and fines. Since Basel II operation
risk is seen as including legal and reputational risk and all are seen as
getting worse. Central bankers have become so concerned with this that a joint
project has been set up by London School of Economics, UCL and Queen Marys
College, to look into the causes of this, with research commencing in 2013.
What is needed now is a more sustainable financial system,
one that incorporates the Berkeley definition at the top of this piece with a
cultural ethic that is not about screwing the other party to the floor or
simply geared towards chasing the bottom line. To enable this will take time, the research
being carried out will help to highlight the traits within the culture that can
cause it and that is when the real work will begin. Changing the culture of an
organisation is one thing, look at Barclays Bank for example, with the appoint
of Anthony Jenkins as CEO, who in January 2013 at a press conference in
Westminster talked about a new culture of banking, more focused on the customer
and the rebuilding of trust, was that recognition that something must change or
load of PR, only time will tell.
What is much larger task is changing the culture of an
industry and that is a whole different ball game, and really, is it possible? I
think it is by having it forced and by that I don't mean legislation from on
high. But through changes in the way finance in done, game changers and
innovation within the finance industry space. The Internet and technology can
play a major role in this, and in some sectors this is already got underway.
Just look at the loans and personal investments space, with the birth of Peer 2
Peer lending, where individuals lend funds to individuals or to business in a type
of reverse micro finance model. Lenders get better returns than if their funds
where invested inn banks and borrowers get better rates than if they borrowed
from banks, creating a win- win for all.
This is still a fledging industry, with only a few players in the
market, it is starting to gather pace and over the next few years more will
enter to create an efficient market. In the UK The Bank of England has
recognised it as a real disruptor in the market and the UK Government has announced
that in April 2014 it will become regulated industry, which will legitimise it
further. Other industries which is is going through a quiet revolution is
factoring, where businesses sell there accounts receivables and a lower % to
improve cash- flows, this is now being carried out through the Internet on
specialised sites that bring together investors and businesses indeed of
liquidity. Both of these two examples have lower fees than the bank and also
facilitate the transaction in quicker time.
Other disruptive technologies that will force change will be
Near Field Communication (NFC) it always communication between devises and can
be used for exchanging data and making payments. It is already changing the way
people in remote parts of Africa pay for goods and services and is now being
developed in the UK for a major mobile phone company, by the same team who put
it together in Africa.
I like to think of these innovations in the finance space as
the beginning of Sustainable Finance and incorporation of the ‘social
contract’, to quote the Work of the British political philosopher Thomas Hobbs.
What will come after these or how these will develop is something I hope to
write about in the future on Sustainable Inc.
Interesting Reading:
Michael Lewis, Boomerang, The Big Bust. Allen Lane. 2012
Michael Lewis, The Big Short: Inside the Doomsday Machine.
Allen. 2011
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