Policy Research in Macroeconomics

We can’t afford a capitalism that doesn’t work for the next generation

With acknowledgment to OneNYC 2050 http://onenyc.cityofnewyork.us/initiatives/fight-for-climate-accountability-and-justice/

As we look ahead, young people believe there is no regard for future generations who will suffer from the decisions taken today in the name of “economic growth”.

In a recent interview the 18-year-old climate activist Xiye Bastida beautifully summarised why the next generation is angry: 

“Companies say their role is to help the economy. They say, they don’t have the need to be socially responsible or care about biodiversity. We create jobs.”

Xiye and young climate activists around the world argue that this concept of capitalism means that it is ok to only care about the ‘now’. It means there is no interest in how the system of deregulated production affects the planet. There is no responsibility to care about the workers and their families once the salaries are paid. There is no regard for future generations, who will suffer from decisions taken today in the name of “economic growth”.

The passion of young activists is powerful because they hit our old capitalist system right at its core. If capitalism cannot provide for the next generation, then why do we need it? Companies, which are extracting the planet’s resources and exploiting workers, do not deliver prosperity for the future. At best they deliver profits for now – at worst, they destroy opportunities for our children and their children because they are spoiling our planet. And yet, isn’t the big promise of economic growth supposed to enable societies, communities, and families to provide a better future for the next generations to come?

For far too long, Western societies believed that, while capitalism may not be the ‘best’ system, it is the only one to bring prosperity. We believed that companies, even though they might act in their most rational self-interest, still create jobs. We were complicit in the idea that wealth would eventually trickle down and solve all other problems. Although there were flaws to that system, capitalism still seemed the only option and so governments, international organisations and investors supported companies’ interest wherever possible.

If we are to succeed in changing the capitalist world, we need to move on to a new reality with a mission towards a zero-carbon economy at its core. Protecting our environment and preserving the relationship between people and the planet needs to be the driving force of our economic system – not a side show. We, as a society, need to show we can deliver a future for all.

Such a radical shift in our economic system hinges on our ability to change our own behaviour towards carbon-neutral living. But we also need to invest differently. Finance is the bloodline of capitalism. Changing the way we channel resources will determine company behaviour. And while there is some progress in the investing ‘space’ towards environmental and social investor activism, far too little has been done.

Environmental, Social and Governance (ESG) factors involve assessing a company’s environmental impact and its social impact, as well as its internal and external relationships and broader value chain. It’s a fairly simple investigation into how a company operates. Given ESG is a relevant risk assessment, it comes to no surprise that ESG compliant companies regularly fare better through crisis than non-compliant firms. All it would take for investors is to negatively screen for ESG compliant funds or companies to invest in. And yet we are far away from adopting or requiring ESG criteria for 100% of portfolios.

There is also a more active approach to financing a carbon-neutral economy. Sitting on boards, being an active investor and closely cooperating with companies at all growth stages, is a strategy to impose checks and balances on corporate activities. This type of active sustainable investing is still in its infancy, but is an effective way for all types of investors to nurture the zero-carbon economy. Surely, the greatest power lies with the institutional investors, meaning pension funds, sovereign wealth funds and the large asset managers, who collectively amass the world’s largest pools of funds. But activism on the individual investor level should not be underestimated. Private investors have the advantage of providing quick cash for promising sustainable ventures. They also are pioneers in the industry – often setting the agenda for the rest.

To channel all resources into sustainable investing we urgently also need more information. One of the greatest barriers right now is the lack of a common language. Here, investors are desperately looking for government guidance. Once politicians issue strong frameworks for setting, measuring and reporting sustainable objectives, we can create fully carbon-neutral portfolios and we will be able to pursue bad corporate behaviour based on that data.

We cannot afford a capitalism that doesn’t work for the next generation. Luckily, the power of finance lies in our hands to provide a future for all.

Anne Henow is currently a Senior Research Consultant. She has a doctorate in development studies from Cambridge University, focusing on the role of not-for-profit (community, savings, cooperative and development) banks in securing resilience in financial systems.

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