There has been a lot of attention paid to the stability of our finance system but far less to its purpose.
What is a finance system for? The Sustainable Finance Forum (SFF) is proposing the purpose is to serve the long-term interests of society, the environment and the economy. This requires capital flows to be aligned towards meeting the challenges ahead, especially the urgency of the transition to a low-emissions economy and ensuring the inclusion of all New Zealanders.
There are obstacles to overcome. Incentives in the finance system for employees and management are linked to sales and profits rather than creating long-term value for stakeholders. Sustainability is not built into the mandate of regulators or financial institutions. Across all parts of the financial system — including banking, investment and insurance — there is a lack of objective information about social and environmental outcomes. And the most widely used financial models have no connection to the real world consequences of financial decisions. A long-term process of change is needed to overcome these barriers. Reform of the financial system is overdue. Pressure for change is building from society.
The demand for ethical investing is growing rapidly and consumers are demanding greater transparency. They want assurances their banks aren't making loans for projects that fuel climate change. They are concerned about insurance coverage in an era of pervasive climate impacts.
The draft report from the SFF contains a wide range of proposals. They would educate and empower the consumer and inform the public, require reporting on metrics that integrate sustainability with financial information, and strengthen legal and institutional structures for sustainable finance. Undoubtedly the adoption of such a roadmap would require change for a sector that has recently experienced regulatory reforms. But it is also a roadmap of opportunity.
