The failure of capital markets has caused shock, anger and widespread demands for major reforms. It has also prompted critical examination of the financial systems which made such a crash possible. These themes have been explored in Jonathon Porritt’s Living within our Means.
Rethinking Capital takes up some of these themes and sets out to build a platform for action by outlining some of the work done by Forum for the Future and others on how to create sustainable financial markets.
We have identified five areas which require particular attention:
There are five interlinked areas for action to address these challenges, which we aim to refine by convening round table discussions with business, the public sector and the NGO and academic communities.
1. Rethinking risk assessment and asset valuation techniques
We need to create a financial system which adequately values both natural capital, such as ecosystems and biodiversity, and social capital, such as strong communities and trust. And it needs to be is much more effective at managing financial, social and environmental risks.
Engaging with this challenge, Forum for the Future is working with businesses to overcome the barriers to long-term thinking. In addition, a toolkit to help companies find the business case for sustainability has been developed and we are also working with the insurance industry to respond to the challenges of climate change.
2. Recapitalising – not just the banks, but social and natural capital too
We need to find ways to ensure that public and private investment is aligned with the public good, conserving the environment and delivering social benefits. We need to explore public/private partnerships with the ability to deliver funding at scale and demonstrate the benefits of up-front investment.
Our research in this area has been on investment for adaption to climate change and encouraging investment in forests. In addition, a forthcoming document will report on innovative structures for social and environmental outcomes.
3. Stimulating investment in low-carbon, resource-efficient assets
We need to examine how far the current set of global stimulus packages combine the goals of generating growth and employment, with the imperative of shifting to a low-carbon, resource-efficient and equitable economy. We also need to examine how to stimulate private sector investment in this transition.
Steps towards this goal have been taken by the climate finance initiative, which aims to help public sector organisations find smart ways to raise and use money to cut carbon.
4. Re-regulating capital markets – including remuneration
We need firmer regulation and reform of remuneration schemes to shift the focus of capital markets from short-term returns to longer-term perspectives. This will lead to improved methods of risk assessment and valuation and place the emphasis on sustainable patterns of growth.
5. Exploring sustainable growth
We need to question our financial system’s assumptions of continuous growth and rethink our focus on GDP as a measure of success. We need to explore the business models, structures and mechanisms which will support sustainable growth, which does not rely on ever-increasing use of natural resources.
Forum for the Future are currently working on a vision of a sustainable global economy in 2040 and a strategy for how this might be achieved.