Article A green economy manifesto

Divestment is not enough – how do we tackle big finance?

The greatest achievement of the divestment campaign? It shows us how much further we need to go to build a climate-friendly financial system, writes Fanny Malinen

The divestment movement has taken off quickly and reached significant victories during the last year. Universities, local authorities and churches have divested from fossil fuels. The UN is backing the campaign.

To prevent disastrous climate change, we need to keep 80% of remaining fossil fuels in the ground. It is therefore clear that it makes little sense to invest money in their extraction. What is more, investments in fossil fuel companies risk becoming stranded assets, as the industry would not survive a climate-friendly policy turn. If the carbon bubble burst, public institutions would also lose what they had invested in the industry. For example pension funds often have holdings across the economy in an attempt to invest long-term and diversify risk; but paradoxically a great deal of investment opportunities revolve around unsustainable industries. In 2013, just four oil and gas producers contributed 17% of the total value of FTSE 100.

It makes a lot of sense to divest from fossil fuels. The campaign also popularises the issue of finance, making visible the extent to which financialisation has penetrated our society: why do universities, churches and local authorities have assets to divest anyway? Why is it considered a totally normal part of our economic system that our public services or my possible future pension money rely on the profits of private companies, many of which work against the world even surviving until I am in retirement age?

That is also where the usefulness of thinking of divestment as an answer to climate change comes to an end. In the similar vein as any boycott campaign, it uses our power as consumers to pressure those whose products and services we use. When we start pressuring public institutions – such as universities – through consumer power, we cement the logic of commodification. Rather than breaking down harmful power structures, we strengthen them, using money to buy power and influence.

What we could do instead is to reclaim our power as citizens, the political power that would allow us to for example demand greater public funding to these institutions.

The financial sector has taken over our lives. And as the previous financial crisis showed, there are no laws that would guarantee its smooth working. A finance textbook would tell you that banks exist as mere intermediaries between surplus and deficit units of money: you put some extra in the bank, I need a loan, so our needs meet and you get compensated against the risk with interest rate. But that is clearly not how the system works: interest rates are as much about power as they are about risk. Banks create the money they lend me out of thin air. And the financial industry has engineered complex products that hide and transfer risk away from those who reap the profits.

In short, the financial industry exists for the same reason as any industry in the capitalist system: to make profit. And the logic of profit-maximisation and infinite growth is not at ease with the limits of our finite, fragile world.

The only reason anyone would have an investment portfolio is to make their money produce more money: to profit and grow. Pension funds, local authorities, universities and churches have uncritically swallowed the logic of capitalist financialisation. Redirecting their money from fossil fuels into renewables will not change that.

There are also a myriad of other industries to divest from. The arms industry has very little regard to climate. Mining and agribusiness are very carbon-intense, but seldom reach the public eye.

Last year, Croydon Council’s employees’ pension funds were moved from tobacco to a socially responsible fund, on which the UK Sustainable Investment and Finance Association’s spokeswoman commented: “There is a growing and credible body of evidence showing that you don’t need to sacrifice good returns by following your values, so it’s great news that Croydon Council have decided to switch to an ethical investment fund, citing the ‘better investment deal’ that they will be gaining as a result.”

The quote is revealing. I would argue that climate-friendly values are not about good returns. They are about creating an economy that works for the people, even if that means not-for-profit public institutions providing the financing. A climate-friendly economy would have more equal income and wealth distribution, and a wealth of small-scale enterprises and cooperatives that are more likely to respond to local needs and have a progressive mandate.

There are tools to transform the financial sector to transform the economy. Common Weal, a roadmap for a progressive and democratic independent Scotland, laid out plans for a National Investment Bank. Its investment decisions would not be based on maximising shareholder returns but on social goals, be they creation of high-wage jobs, industrial democracy or environmental goals. NIBs in other countries have proven to be highly profitable, but instead of private hands the profit goes back to the government and can be reinvested.

A National Investment Bank could also support a network of a local stakeholder banks: banks that create value for stakeholders, not just shareholders. They can be cooperative banks, credit unions or public interest savings banks. This would facilitate lending to cooperatives and SMEs that otherwise struggle to get off the ground. The Common Weal concentrates particularly on supporting Scotland’s already flourishing wind turbine industry by encouraging wind farm cooperatives. The banking sector is highly concentrated towards commercial banks in the UK, and independently of the Scottish independence campaign there are calls to convert the already majority state-owned RBS into a network of public banks. Similar localised solutions can be and are applied elsewhere too. Overall, by reducing the need for raising funds from the private sector, public financing would also reduce volatility and improve resilience to financial crises. Companies and cooperatives could then plan long-term, including climate and environmental factors.

These measures in the banking sector could eventually lead to the downsizing of the financial industry and moving the focus from growth to income distribution.

There are of course several transitional paths that could lead there. Taxation is a way to reclaim some of the profits of the financial sector into the real economy: tax on financial transactions, also known as the Tobin tax, could raise billions a year. In 2011, it was calculated that a tax of 0.005% to foreign exchange markets alone could raise around 25bn USD per year – that gives some indication of what it could do levied out to all share, currency and bond transactions. The returns could be used for a renewable energy transition.

Divestment is one of these transitional strategies. But its importance does not lie in it being the answer to climate change. Rather, we should be asking the uncomfortable questions the campaign’s popularity raises about our ability or willingness to think outside the box of financialisation.

Photo: Cropped from David Dixon under Creative Commons License

This article is a response to the topic idea; Banks are a faceless force fuelling resistance to change.

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