THE FUTURE OF FINANCE BLOG

Guest Post: Is Sustainable Capitalism an Oxymoron?

April 23, 2012

We post here the response of Allen White, Director, Corporation 20/20 and Senior Fellow, Tellus Institute, to John Fullerton’s recent blog post reviewing Generation Investments’ white paper, Sustainable Capitalism. We should all feel a sense of indebtedness to Al Gore, David Blood, and the Generation team for raising critical issues regarding “Sustainable Capitalism.” But are they missing the forest for the trees by largely focusing on symptoms of the current system rather than its structural flaws? Aren’t these characteristics of contemporary capitalism creating the volatility and perils that endanger both long-term economic and ecological well-being? Certainly short-termism, flawed compensation structures and quarterly earnings reports induce behaviors antithetical to long-term building just and sustainable economies. But tinkering around the edges is unlikely to yield the values and behavioral changes that are foundational to systemic change. Numerous observers point out that modern capitalism, and the markets that enable it, have evolved into a machine built on extraction not regeneration, competition not cooperation, and accumulation not well-being. Theoreticians and practitioners alike are prone to tinker with many of the symptoms on Generation’s hit list of needed reforms. But short of confronting its structural attributes, we should not expect market outcomes that respect the Earth’s limits—its “safe operating space”—beyond which irreparable damage is inevitable. Regrettably, this is not what either capitalism or markets as we know them are designed to achieve. Even the language of Sustainable Capitalism is captive to this misalignment. In Generation’s words, it “…seeks to maximize long-term economic (my emphasis) value creation” through responsible management of financial capital.” But what about natural, social, human and intellectual capital? As long as we denominate all wealth as the handmaiden of economic wealth, the principles of balance, equilibrium and interdependency that define the nature’s intricate anatomy will never be adapted to the economic sphere, which are exactly what true sustainability demands. Generation refers to this multi-dimensionality in its list of “broader ideas that merit attention…Reconsider the appropriate definition for growth beyond GDP…” One wishes stronger language had been used to correct this critical flaw that undermines global sustainability efforts. Time is late to simply “reconsider”—we have been doing that for more than a decade. How about mandatory reconstitution of national accounting systems by the year 2018 under the auspices of a new, muscular and enforceable international accord. Financial markets, the playground of both Generation and all modern capitalist economies, are vastly over-rated as instruments of creating broad-based well-being. Of course they serve an essential transactional purpose for buyers and sellers of securities (or insecurities, as the case may be). But the drift toward market fundamentalism – minimally regulated, oblivious to nature’s limits, loaded with information asymmetries and high frequency share trades amounting to tens of billions daily –has wreaked havoc to the lives of millions worldwide. And still the appetite among market makers to further reduce controls on market excesses remains insatiable. Beyond the largely symptom-based prescriptions of Generation’s Sustainable Capitalism, I suggest a few actions that at least approach the structural deficiencies that underlie market failures that cannot be solved simply by better information or expanded offerings of “sustainable investment products.” Regulate financial products at the pre-commercialization stage. Governments worldwide assess (the Food and Drug Administration (FDA) in the US case) the public health and safety of food and drugs before commercialization through sound scientific analysis, public review processes, and government commissions dedicated to protecting the public good. The financial crisis has laid bare the risks of exotic financial instruments conceived in the absence of such pre-commercial, public oversight. This needs to change. We need an FDA equivalent for financial markets—a Financial Instruments Regulatory Authority. Get real about sustainability context. The responsible and sustainable investment field over –rewards the appearance of sustainable practices while under-rewarding—or outright ignores—true sustainable practices. In the long-run, it is not sufficient for a water-intensive factory operating in a water-scarce region to gradually improve its per unit water-intensity performance if the aquifer upon which it depends faces exhaustion within a decade. The same for incremental improvements in carbon emissions and biodiversity protection. Investors, companies, rating agencies, communities and other stakeholders themselves need a new generation of leading indicators that position performance assessment in the broader context of the global, regional and local ecological limits and generally accepted social benchmarks for, say, livable wages and income disparities. Bring back “boring banking.” Sustainable capitalism cannot co-exist with unsustainable financial markets. As banks have grown in scale and, since the 1999 repeal of 66 year old Glass-Steagall Act, co-mingled investment and commercial activities, systemic risk has intensified to the detriment of all players except, in large measure, the bankers themselves. Exacerbating this situation is the drift from private partnerships to public traded entities among the large investment banks, spawning all the pressures, self-serving behaviors and short-termism such shifts have occasioned. The recent, high profile, public departure of Greg Smith, the Goldman Sachs executive, is vivid testimony to these conditions. Amar Bhide of Tufts University puts it simply: “If the average bank examiner can’t understand [a financial instrument], it shouldn’t be allowed.” Amen. Bring back the investment-commercial firewall and let the risk takers fully absorb the risks they wantonly incur. These measures are hardly a panacea for all that ails contemporary capitalism. But they at least begin to address the structural conditions that persist and block movement toward a more humane, ecological sustainable economic system. Is, then, “sustainable capitalism” an oxymoron? It will take far more than incremental improvements to the current system to disprove those who believe so. Without a steep rise in political will reinforced by concerted citizen action, sustainable capitalism will remain a distant and elusive aspiration.

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