An abiding memory of the financial crisis has been disruption. Initially, the short-term disruption; Lehmann Brothers’ employees spilling out on the street with their cardboard boxes of belongings. Later the real economy disruption; the financial crisis has scarred a generation, depriving them of jobs and wiping out their savings.
Ten years after Lehmann Brothers filed for bankruptcy, policymakers should not only focus on the narrower lessons of the crash but should also seek to make finance more effectively serve the broader economy.
The 2008 financial crisis created a need to re-evaluate the financial system, with a view to reconnect finance and the real economy. This opened the door to new ideas to stimulate the economy and manage risk, which in due course led to a greater focus on integrating sustainability, previously a fringe topic in financial circles, into the financial system with a particular focus in green finance opportunities and climate risks.
The G20 countries created a Green Finance Study Group, and asked the Financial Stability Board to generate recommendations on climate risk transparency for companies and investors. Within the EU the Sustainable Finance Action Plan looks across the whole financial system to integrate sustainability into European institutions. The UK set up a Green Investment Bank (since privatised) and appointed a Green Finance Taskforce. More recently the Chancellor announced the creation of a Green Finance Institute with a view to championing sustainable finance, both in the UK and globally, thus cementing London’s position as a green finance hub.
The trend has not only been confined to Europe; China’s Green Finance Committee of China Society for Finance and Banking has driven numerous policy reforms that put the country at the forefront of policy innovation, including the use of pilot zones for green finance measures. Indonesia’s Sustainable Finance Roadmap is another example of an emerging economy planning to mainstream climate considerations into the financial system. In October Canada’s Expert Panel on Sustainable Finance will make its recommendations to the Ministry of Finance.
As well as government efforts, some of the most authoritative figures within the financial system – central bankers and financial regulators - are now working to strengthen the global effort to achieve the goals of the Paris Agreement through the Central Banks and Supervisors Network for Greening the Financial System. Furthermore, the public strongly supports the need for making finance support sustainability goals and a pressing need to ensure it is resilient to climate risks; this could avoid another systemic crisis which destroys economies and savings.
Whilst these efforts are certainly significant and growing, there are incumbent interests – inside and outside the financial system – who are pushing against meaningful reforms that would reward businesses protecting the environment, and penalise those damaging it. In the event of any future financial downturn it is possible that these interests may seek to postpone or deprioritise the wave of sustainable finance reforms in the name of financial security – but this would be a profound misunderstanding of their purpose which is to present a true and fair picture of financial risk and opportunity so that we can build a sustainable economy.
The financial crisis wrought havoc, and the social contract between finance and society was severely damaged. Through mainstreaming sustainability, politicians have the power to ensure that at least one of its legacies will be positive. As the memory of the crisis fades, keeping political momentum around sustainable finance is critical to ensuring that the financial system is safe, sustainable and working for people to protect their savings, support real investment in beneficial solutions and allow people to align their money with their values. This is not all we need to do to deliver a safe climate and broader sustainability, but it is a critical part of aligning our economic system with the future we want.