As the COP26 summit in Glasgow is now underway, with reportedly over 25,000 delegates from around the world competing for space at the event and squashed into the city’s Airbnb market, many will have missed sight of a new elephant in the room.
Alongside the usual slow, grey pachyderms that take up residence at such events – namely the large nation state emitters, seeking to minimize the economic cost and hit to short-term competitiveness implied by the possibility of a truly green and just transition to decarbonisation – this new elephant may again move centre stage when it comes to measuring the success of this twenty-sixth attempt by global leaders to take climate breakdown seriously. This new elephant is private finance, of course. More specifically, it is those global investment companies that have long controlled much of the world’s investable wealth.
Citing 2021’s IPCC report as a ‘code red’ for humanity, UN secretary general António Guterres states we now stand ‘at the verge of the abyss’. Simply put, we are in a genuine crisis (in the etymological sense of the Ancient Greek word krinô, meaning to choose, decide, or judge). That judgement will be made between two choices. One is to allow private finance to dictate how its investments will continue to shape humanity’s collective future. This would ensure that the risks of any ‘net zero’ adventures were borne by nation states and taxpayers, whose benevolence would not be repaid with a commensurate share of the profits of any ‘green’ revolution.
A second choice – as argued for in our book Crowdfunding and the Democratization of Finance, published today by Bristol University Press – is to reach a new settlement between finance and democracy that privileges people and planet over profit. As with earlier moments of world-historical crisis, our book examines the power of finance to shape (and so reshape) the world we all share, and the level to which finance has been allowed to exercise its power independently of any real democratic control or public accountability.
Our argument is based in part upon our own experiences at the forefront of one area of finance that emerged globally in the twenty-first century, but which we show has played a significant role in democracies since ancient times – namely, crowdfunding and peer-to-peer (P2P) lending. Here, the book offers three notable insights.
First, we often don’t trust ourselves with money, driven by a lack of confidence in our ability to understand it and so to make ‘good choices’. Evidence for this comes from our frequent desire to hand over responsibility for our money to a small group of professional financiers and their institutions. Not even the global crash of 2008 could shake our faith that banks understand money better and so remain the safest place to keep it.
Second, and as a result, an increasing proportion of the entire world’s investable wealth is now managed by private finance companies who command significant economic rents for their services. More than 40% of it – an estimated US$110 trillion according to the accountancy firm PWC – is now controlled by just a few global investment companies. And it could be worse still. In 2020, the Financial Times reported that just 18 individuals sitting within professional finance and wealth management firms now hold sufficient power over bond markets to shift government policy.
Third, to transition to net zero in the timeframe set out by the IPCC, in order to tackle climate breakdown and deepening social inequalities, will require colossal levels of investment in green public infrastructure. With private finance the major provider of capital to deliver those projects, governments are looking to this new elephant to move quickly in the interests of people and planet. Since it cannot or will not do so, we believe the time has come to renew the settlement between democracy and finance.
Drawing upon sociological and anthropological insight, our book shows that the emergence of the Western model of democracy in the 6th century BCE established a relationship between a system of finance and a system of government that is pertinent for present day global challenges. Ever since the reforms of the Athenian leader Solon first established citizenship by removing the power to enslave individuals unable to settle their debts, a long-standing conflict between the interests of finance and democracy has endured.
Money is the most powerful tool of social transformation ever invented by human societies. It is what has created a world now facing climate breakdown, and yet also a most vital solution to it. The power of money to effect positive change in pursuit of decarbonised societies, specifically through investment into green companies and projects, suggests the possibility of a better relation between finance and democracy that also rediscovers the purpose of money. After all, the decision to invest in a green project is rarely just a matter of optimizing returns; it is typically a political choice between different types of outcomes created by our money.
We are optimistic, therefore, about the potential of crowdfunding and P2P lending to deliver greener outcomes, renewing the social license of finance by involving greater numbers of people in decisions that ultimately affect them all. Alternative financial innovations, such as the Local Climate Bond product we helped to create and that is already a part of the UK government’s new Net Zero Strategy, gives us cause to hope that finance may soon no longer be seen as governed by some immutable natural law, but is instead brought back into democratic control.
As all those attending COP26 are advised to remember, the only true limit to the ways in which money and finance can be deployed to humanity’s common benefit is the human imagination. Even new elephants would do well not to forget that.
Mark Davis is Associate Professor of Sociology at the University of Leeds. Bruce Davis is Cofounder and Joint Managing Director of Abundance Investment.
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