Banks and investment funds are the cogs in a modern society that keep the economy turning. They are key components of the financial system and allocate funds from savers to borrowers in an efficient way. They have the ability to stimulate economic growth and develop new industries through their allocation of funds to the most profitable ventures and provide the mechanism for individuals and institutions alike to invest their capital in those ventures.
Most industries rely on the banking industry for the funding of new ventures, expansion in new areas and support through leaner times. This is especially true in the fossil fuel and mining industries that use bank funding to expand existing infrastructure, perform exploration activities and build new facilities.
The power that the banks have in an economy is enormous but the banks investment allocation decisions are primarily based on a risk analysis that excludes any impact on the global commons. This public cost is similarly excluded from the return on investment calculations for any particular venture.
This means we have a global economy that is making decisions accounting only for the costs and benefits to an individual company and not the variety of other stakeholders impacted by any investment. This is having a serious detrimental impact on anything that is not assigned an economic value such as our climate, biodiversity, acidification of the oceans and income equality, to name but a few.
The growth of a global civilization means that we can no longer disregard the global commons and trust in market forces to deliver economic growth at all costs. Capitalism should not be thrown away as it has delivered huge benefits but neither should it be let run amok as we watch our world deteriorate in the face of economic apathy.
Banks and investment funds are the levers with which economic decision-making can be influenced. We need to develop the tools to direct economic growth in a sustainable direction, one which means that our global civilization isn’t threatened with annihilation from an overheating climate, rising economic inequality and degradation of our natural resources.
Socially responsible investing principles can help achieve this through encouraging corporate practices that promote environmental stewardship, consumer protection, human rights, and diversity.
However we must move from thinking of socially responsible investing as a niche investment class to the industry benchmark for all financial services providers.
A great deal of focus is being placed on the upcoming G20 meeting in Australia and standardization of regulatory capital rules internationally. This is important as no one wants a repeat of the Global Financial Crisis and stronger capital rules will mean greater stability in the system. However the elephant in the room remains that banks and investment funds are the single most powerful source of influence for investment decision-making within the global economy. Without the expansion of socially responsible investing principles into their mainstream business the Global Financial Crisis will look like a side-show to some of the greatest challenges we have ever faced as a human race.
Views are my own
Author Sustaining Our Future, Risk and Financial Services professional with over 15 years’ experience in London and Sydney.