06 November 2010

Sustainable Finance – What’s that?

Especially in the aftermath of financial crisis 2007-2009, banks and other financial institutions have started or just about starting to talk about sustainability being their purpose or at least one of their important concerns. The reasons behind can be guessed easily: the magic word “sustainability” sounds appealing for the customers, employees and society in general; today it sells better than other messages and, among others, helps financial institutions to improve their image that has deteriorated because of all the consequences of their former irresponsible behavior. Now the rightful question arises: What is meant by sustainability?

Usually the talk quickly goes to the contribution to sustainability through lending and investment. This involves providing financial services that help stimulate solutions to social and environmental challenges such as climate change and access to clean water, being at the forefront of the development of sustainable businesses, tackling issues such as poverty and access to finance in rural areas.

The other aspect of sustainability that is also being spelled out by some in their communication is promoting sound and sustainable financial situation for households and enterprises. This involves financial education, advising customers rather than selling products no matter what, raising people’s awareness about financial products and helping them by improving their financial planning.

What seems to be largely omitted by industry practitioners and also not paid enough attention by financial regulators is the third category of sustainable finance: making the financial system itself (notably more) sustainable, i.e. improving it in a way that it would no more generate serious financial crises and crashes. Among others, this would mean abandoning complex but inherently defective financial instruments, accepting lower profits, revising the structure of financial system and ultimately reconsidering the principles of money creation.

The reasons of not focusing to the third category shouldn’t be that difficult to guess. First, while the two other aspects of sustainable finance have a potential of contributing to increased profits, the third one would explicitly mean admitting that the historical average of 15% return on equity from banking operations is not sustainable. Secondly, people do not have a good and strong enough vision of what the sustainable financial system should be. Furthermore: only few seem to really understand the fundamental issues of our current financial system.

Author’s note
I strongly believe and very much welcome the concept of sustainable finance if implemented as discussed and laid down in the respective policies. At the same time I want to stress that it would be even much-much better if the issue of sustainable financial system were addressed properly too.

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