Twelve years ago, a financial collapse spread turmoil across the world. Lives and livelihoods were jeopardised by the failings of finance. Today, faced with a new crisis, the financial system has had its shoulder put to the wheel to keep jobs secure and the economy afloat. This could be the catalyst for a great transformation of the financial system: from master of the economy to servant of our needs. The consensus is growing that we must ‘build back better’ and marry a recovery from the pandemic’s human trauma and economic collapse with a just transition to a carbon-free future. A transformation of the financial system must be at the heart of this change.
Governments around the world have shown that, during times of crisis, old orthodoxies can easily be abandoned, and the state can wield dramatic power to direct the financial system to tackle urgent challenges. Harnessing the financial system to meet society’s needs should become the new orthodoxy of the future. Partly, this will be delivered through an activist role for public institutions. It will mean a central bank willing to ensure the costs of recovery and rapid decarbonisation are kept low through monetary financing and supporting low-cost government borrowing. It requires a government that converts the growing debts of the private sector into equity investments, conditional on companies themselves making a transition to a zero-carbon pathway. Finally, it means a revival of public banking with a green purpose to help provide the long-term investment that will both get us to real zero carbon emissions and provide decent, meaningful jobs. But this activist role must be accompanied by a democratic shift, with full transparency and accountability of all the institutions involved, and real efforts to support widespread participation and engagement.
This does not have to mean a top-down, state-led financial system: quite the opposite. A new regulatory and policy framework that promotes values-based finance could support the growth of institutions hard-wired to put long-term social and environmental goals first and weed out those focussed on short-term financial gain. High street banks could respond to the needs and interests of their customers – citizens – and convert themselves into paragons of social-interest banking. Regulations, policies and attitudes that hold back innovative purpose-driven financial institutions like mutuals, credit unions, community-based and social purpose organisations, could be transformed to enable them to once again become central actors focussed on providing safe, long-term, responsible finance to all households and companies. The sleeping giants of the system, pension and insurance funds, could align their actions with the interests of society – their members and clients – and put their muscle behind the just transition. The dark and under-regulated institutions of the shadow financial system could be brought within the fold or forced to wither away. Finally, to make sure this is a truly just transition, tax havens and financial secrecy that allow the poorest countries to lose out to widespread tax dodging could be swept away for good.
There is wind in the sails for such a change. A switch from a debt-fuelled economy stuck for years in the doldrums, to one that rebounds confidently through purposeful investment offers governments a real hope of emerging from the crisis with credit. The data revolution that is underway in finance could mean rapid changes in practices, better transparency, and a decentralisation of power in the system. A renewed public focus on true meaning and value in life offers a chance to sweep away unhelpful dogma and practice and imagine a new set of rules for finance that put people and planet first. Finally, this is a vision that many people in the financial sector itself could embrace, redeeming finance’s image and transforming their professions to build a financial system fit for the future.
For more ideas from the Lab team and community about transforming finance after the COVID-19 crisis, visit our transforming finance page.