We must resist calls to start all over and obliterate our existing financial and monetary system. Instead we need to move the debate on to re-modelling the financial sector to be a force for good. A combination of recalibrations to existing regulatory frameworks and voluntary agreements among banks could start to deliver positive environmental and social change that in turn will shape the future of our society and our planet.
Hurricane Katrina, the tropical cyclone that bore down on the US Gulf Coast with devastating effect in August 2005, could be remembered for exposing and, quite possibly, deepening the cracks in the global banking system that would lead it close to collapsing a few years later. At the time, Katrina was the US' costliest "natural" disaster with damage to property alone exceeding $100bn and it exposed the flaws of the sub-prime mortgage market that subsequently infected the global economy.
The devastation caused this year by Hurricane Harvey and Irma continue to be a reminder of the effect that climate change can have on our global economy. The impact of uncontrollable climate change threatens to severely destabilise the whole of finance.
Christian Aid's Big Shift campaign offers a stark insight into the current lack of alignment between finance and what most would consider socially useful. While achieving globally agreed climate ambitions should clearly be in the long-term interests of both the finance sector and the economies it is supposed to serve, a staggering $1 trillion continued to be invested in fossil fuels in 2015, while only $300 billion was in renewables.
Since the 2008 financial crisis, I believe we have seen three phases of public debate. The first was all about dealing with the crisis and stopping the contagion. Then we moved on to how we could stop it happening again and new regulations have been implemented concerning the reserves bank’s need to hold and the accountability of individuals within banks. Regulators should now have the power to root out criminality, disproportionate greed and other unsafe banking practices found to have engrained themselves in a culture of deregulated banking.
We are now at the start of an exciting third stage where we can move the debate on from what went wrong, to whether our banking and financial system serves us in the right way and what role it could play. For all the malaise that surrounds it, the existing financial system remains our best chance to tackle the seemingly intractable issues facing the planet today. With the right political will, the finance sector is uniquely placed to lead the transition to the sustainable economy.
Triodos Bank has been at the forefront of a movement championing "sustainable finance" for more than 30 years. We are the UK’s largest social bank and we exist to show that finance can have a social purpose beyond fulfilling functional roles such as managing risk and facilitating customers' payments. Finance, and how it is directed, has a huge impact on the shape of our economy and society.
We have been described as a Challenger Bank in the past. Which is a bit odd for an organisation that has been around for 22 years in the UK! For us the term ‘challenger’ really relates to a new breed of start-up banks looking to provide competition. We should scrutinise what difference they are really offering. While we do need greater diversity in banking it is important to remember that alternative models already exist. What we really need to do is build the pressure to change banking at scale to promote a fairer and more sustainable society.
Towards sustainable banking
The EU, G20 and UN are among the international bodies giving serious thought to how we reshape the financial system to align it to the long-term interests of citizens. Blueprints for ambitious change are also coming out of the banking industry itself. The Global Alliance for Banking on Values (GABV) represents 43 financial institutions, including Triodos Bank, spanning all continents with more than 41 million customers and $127 billion in assets.
The GABV has published a white paper “New Pathways – Building Blocks for a Sustainable Finance Future for Europe”, expressing the collective will of these institutions to recalibrate the focus of finance so it leads the transition to a sustainable economy. Among the recommendations is for politicians, at a European level at least, to empower their regulators to require the amount of capital to be held in reserve to be linked to the social and environmental risks of their investments.
Nothing drives the behaviour of bankers as much as regulatory capital requirements. Capital surcharges could be applied to assets with higher environmental and social risks, or which do not comply with the UN's Sustainable Development Goals (SDGs). This would align banking to the reality that it is impossible to achieve financial stability via investments that are not sustainable.
There is nothing revolutionary about this. Risk weightings are a longstanding tool used to ensure banking doesn't become unsafe. Indeed, requiring banks to disclose their exposure to social and environmental risk wouldn't require any more work. Bankers already assess these risks because they understand the significance. They just haven't been required to do anything about them.
There are reasons to believe banks understand the tipping point they're on. Following calls from Bank of England governor Mark Carney, 11 major banks, holding more than $7 trillion, earlier this year agreed to start reporting on the risks posed by climate change on their assets. Meanwhile, 13 CEOs from the Dutch financial sector have declared their intention to actively work to achieve the goals of the Paris Agreement in a joint letter to the Dutch government.
In addition to recalibrating regulatory instruments to encourage genuine long-term stability, we must encourage diversity and collaboration among financial institutions. But perhaps the most exciting development could be the demand created by more and more people that are realising they have the power to consciously choose where to put their money. Our research has shown that over 60% of people want to know where their bank lends their money, but 75% are unaware of where it actually ends up.
With more transparency and choice in banking then individuals, institutions and businesses can all make this choice. These steps will help to unearth the underlying value of banks to society, as well as their potential to become important assets in tackling the issues faced by people and planet.
Bevis Watts is Managing Director of Triodos Bank UK