The true purpose of finance: a sustainable society

Lion’s share of $300tr global capital stock should go towards serving society, environment

KARACHI:

The futurist Willis Harman said, “Business has become, in the last century, the most powerful institution on the planet. The dominant institution in any society needs to take responsibility for the whole.” (cited in Hawken, 1992: 100, cited in Gladwin, 1995, p 898)

In 1970, Milton Friedman, the neo-classical economist, referenced the slogan “taxation without representation”, borrowing from Lord Camden’s speech on the Declaratory Bill of the Sovereignty of Great Britain over the Colonies.

What Friedman might not have realised was that the entire field of sustainability is a study of “taxation without representation”, permeating through many layers of stakeholders.

The environment is being taxed (without representation) by the pathological consumerism of business and society, while society is being taxed (without representation) by the inequality and injustice perpetrated by the powerful elite, and governments claim they are being taxed (without representation) with a perpetual barrage of criticism from the mainstream and social media.

According to McKinsey & Company, the global financial stock was poised to exceed $200 trillion by 2010 and should be well close to the $300 trillion mark by the time this article is published. Needless to say, the global financial stock has grown faster than the world GDP, and most of this growth has come from an outpaced expansion of debt.

This is alarming in light of the fact that the “annual global ecosystem services” are valued at $17-33 trillion.

Going back to Friedman’s metaphor for “taxation without representation,” could a hypothesis be made that the difference in value between the total financial stock and the value of global ecosystem services is the tax that the environment and society have to pay in filling the ecosystem deficit?

Inevitably, there is “no such thing as a free lunch” and someone has to pay the difference.

In addition to the puzzling value disparities between the financial capital stock and the natural capital, we also know from extensive literature that management theory has conventionally been devoid of bio-physical foundations.

The “anthropocentric paradigm” has so strongly taken over and dominated discourse that any “non-human” discourse seems to be non-existent in the management theory.

This state of affairs has created an equal and opposite reaction within the field of sustainability management, with environmentalists leading the charge and sending the financial sector to the back of the bus.

There is much opportunity to advance scholarship in the field of sustainable finance. After all, the roots of financial institutions were socially motivated and originally focused on the provision of liquidity, allocation of capital and facilitation of economic and social progress.

Pitt-Watson and Mann point out that the true purpose of finance is to serve society. Building on this, in the paper “The Purpose of Asset Management”, Hawley and Lukomnik say:

“This immediately negates the common refrain of profit as purpose: Making money is not a purpose for the asset management industry, but a necessary condition, much like breathing is required for living, but is not the purpose of life. We do not underestimate the importance of profit. Profit rewards the asset management industry and allows its perpetuation. Absent profit, the industry would cease to exist and the risk mitigation and intermediation, which do serve society, would stop. But we should not confuse an essential input into self-perpetuation for the industry, with the industry’s societal purpose, which is to serve the provider of the funds it manages.”

Our current institutions and economic models are designed around neo-classical economics and our current model of innovation is contradictory to sustainable development.

The role of management is to provide an enabling environment for innovation to flourish from the bottom-up.

The work of Elkington drives home the importance of “bridge-making”, when it comes to sustainability, business and finance. It proposes framework-based and structured approaches to allow businesses to take concrete action around sustainability issues.

For example, his 39 steps to building sustainable businesses are actionable and measurable. These are characteristics that resonate with the financial world and could serve as good bridge-makers.

If prosperity comes about as Jackson describes in his book “Prosperity Without Growth”, governments and the private sector must give sustainable finance a serious seat at the table so that the lion’s share of the $300 trillion stock of global capital can return to its true roots – serving society and the environment.

The writer is the founder of ESGTree.com, a tech start-up platform, and a doctoral researcher at the University of Waterloo

 

Published in The Express Tribune, March 14^th, 2022.

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