Should the financial system be transformed?

Should the financial system be transformed?



Humanity is facing a challenge unprecedented in its history. A challenge widely documented by scientists around the world for decades, the reality of which is supported by edifying figures. According to the latest IPCC report, published in April 2022, we are currently heading for a warming of 3.2°C by the end of the century. More than 3.3 billion people are considered “very vulnerable” to natural disasters, including droughts, heat waves, storms, floods and water shortages, the frequency and intensity of which are set to increase in the years to come. The wealthiest 10% of households in the world alone account for between 36% and 45% of total greenhouse gas emissions.

In 2015, 170 States pledged to act to ensure that the Global warming remains “clearly” below the 2°C threshold compared to the temperatures of the pre-industrial era. Seven years later, the record of public and private action is meager. The Earth continues to warm, inequalities continue to widen, and no massive ecological awakening seems to be on the horizon. “Insanity is doing the same thing over and over again and expecting a different result,” Albert Einstein is said to have said. In our ultra-industrialized, globalized and financialized world, madness may stem from a belief: that we can succeed in achieving ambitious environmental and social objectives without affecting our growth model. Without rethinking the economic policies that govern our trade. without involving the financial system. Without changing it.

Green finance

Of course, not everything is to be thrown away in the current system. For years now, and in particular COP21, the market has begun to slowly evolve to incorporate new analysis criteria: environmental, social and governance criteria (ESG). According to a report by the Global Sustainable Investment Alliance published last year, 36% of assets under management in the United States, Canada, Japan, Australia and Europe are now managed by integrating criteria extra-financial. The taking into account of climate risks in the same way as financial risks by fund managers is also becoming more systematic. Some business sectors are particularly exposed to physical risks, i.e. directly linked to climatic hazards, such as natural disasters, but also to background phenomena such as rising temperatures or sea levels.

The physical risks are the easiest for financial players to take into account, but are not necessarily the ones that will have the greatest impact on their portfolio. The real challenge is that of transition: for investors, it is a question of both avoiding the value of assets that will no longer be relevant in a low-carbon economy, and taking advantage of economic opportunities over the long term. Some sectors are particularly affected, such as transport or energy, at the forefront of the ecological transition. “These risks may materialize over a relatively short horizon, as the IPCC scenarios compatible with the objectives of the Paris Agreement require a drastic change by 2050 to achieve carbon neutrality”, specifies Noémie Hadjadj-Gomes, responsible of research at CPR AM.

Insufficient data

Concretely, asset managers must rely on others to take these risks into account in their models. They rely on external suppliers, without there being any standard methodology to manage the data provided. The same problem exists for the integration of ESG criteria by asset managers, which varies greatly from one management company to another, from one country to another, or even from one theme to another. “Capital managers need indicators to make decisions. The difficulty we encounter today on a global scale is the production of quantifiable and reliable data”, explains Caroline de La Marnierre, founder of the Institute of Responsible Capitalism. While certain themes are beginning to gain consensus, in particular gender equality and the carbon footprint, others remain little exploited due to the lack of homogeneous data, such as biodiversity or inclusion.” On these subjects, investors unanimously tell us that the data is not usable because it is too qualitative, or not comparable from one country to another”, she continues.

There are also methodological biases to consider. For example, portfolio temperature metrics are based primarily on forward-looking data, and little or no progress on the progress already made by the companies in which they are invested. “This approach is interesting because it is very telling, but it is based on many methodological choices. It can be useful for estimating a company’s level of commitment, but in our opinion it is still too early to use it as a construction tool. portfolio”, explains Noémie Hadjadj-Gomes.

Green finance has developed a lot, but it is not enough. Regulation must play its role, it is decisive if we want to avoid greenwashing and the enormous financial and social costs linked to climate change”

better regulate

If these two problems were perfectly resolved, if all market players benefited from perfect information on the environmental, social and governance criteria applicable to the companies in which they invested, as well as an acute awareness of the climate risks to which they were exposed, would the market naturally finance the ecological transition ? “Green finance has developed a lot, but it is not enough. Regulation must play its role, it is decisive if we want to avoid the greenwashing and the enormous financial and social costs linked to climate change”, believes Noémie Hadjadj-Gomes. An opinion shared by many so-called alternative currents of thought, who question the possibility of maintaining our growth model. “We live in a society of drug addicts to growth: States, companies, municipalities, all the players in the system are condemned to grow or die”, affirms Vincent Liegey, researcher, essayist and author of “Décroissance” (Tana Editions). “But infinite growth in a finite world is not possible, he continues. We have exceeded a certain number of thresholds of irreversibility. violent.”

Act collectively

Who, then, to direct the work of this necessary transformation? “The financial sector must support companies that contribute to the transition. But management companies must not act in their corner: it is a collective challenge that concerns financiers, companies, regulators and even civil society. there has to be a mass effect for it to work,” says Noémie Hadjadj-Gomes. A position to qualify for Caroline de la Marnierre, who believes that if everyone can act on their own scale, large players have the means to change things more quickly: “Our model of capitalism is mainly driven by large organisations, whether asset managers, companies or public organisations”, she recalls. However, the behavior of large organizations is not always exemplary, whether it concerns companies or financial players. The allegations of greenwashing by the asset management subsidiary of Deutsche Bank or the memorable presentation of the global director of responsible investment at HSBC, Stuart Kirk, suspended after his climate-skeptical remarks, are two examples of this. To encourage them to act in the right direction, States must act.

Young generations

Until today, however, States have shone by their ambitions but not by their actions. However, they have a crucial role to play, in particular to exert regulatory pressure on financial players. The great shift in French finance towards greater sustainability has also been greatly pushed by the public authorities, from the creation of the SRI and Greenfin labels to the obligations of the Pacte law or the Climate law. “Finance can be positive, but it suffers from a bad image because it is not accessible to the greatest number”, laments Romain Sion, director of investments for the Europe region, Blisce, and author of Generation Impact (Baribal editions ). “Individuals are offered unprofitable life insurance policies while the media talk about investment funds generating billions. This creates a climate of mistrust with regard to finance, which is essential to development of any organization.

Among younger generations, organizations that act without taking climate issues into account are increasingly judged harshly. In May 2022, Antonio Guterres, the Secretary General of the United Nations, urged young graduates of Seton Hall University, in the United States, not to work “for the destroyers of the climate”. At the same time, eight AgroParisTech students called, during the graduation ceremony, on their colleagues to “deserte before being stuck with financial obligations”. “Let’s not wait for the 12th report of the IPCC which will demonstrate that States and multinationals have only ever made the problems worse and which will place its last hopes in popular revolts”, advanced the collective.

We live in a society of addicts to growth: States, companies, municipalities, all the players in the system are condemned to grow or die”

Re-embed the economy

“We tend to separate two categories of people: activists, who will take to the streets and carry out awareness-raising operations, and those who have chosen to act from the inside by integrating companies, or even investment funds. This second category of activists is just as essential as the first. We need people who understand the language and the workings of the system to change things,” said Romain Sion. In the same way that each agent of the economic system can play a role in its transformation, alternatives can emerge in parallel with the market economy, such as the circular economy or the functional economy. “We can organize our societies in a much more inclusive way, by rethinking the sharing of know-how and tools, says Vincent Liegey. Some parts of our lives are already thought of in this way, such as the ‘care’ sector. People who do these tasks often do so in a self-directed way, outside of market systems.”

The question that the public authorities must answer is the following: should finance be at the top of the pyramid of our society, or should it be a tool oriented at the service of the general interest? In his book “The Great Transformation”, the Hungarian economist Karl Polanyi defines the market society as a society considered in terms of the market. In this case, the economy is “disembedded”, freed from other forms of social ties, labor and land become commodities and the market becomes master, in a logic of all-powerful self-regulation. “The idea of ​​the market adjusting itself [est] purely utopian, writes Polanyi. Such an institution [peut] exist continuously without annihilating the human and natural substance of society, without destroying man and without transforming his environment into a desert.” The challenges we face require re-embedding the economy in society, and require powers strong audiences who are ready to act.

Find all of Investir Durable #13, the sustainable finance magazine.

Find the Investir Durable #13 file online.

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