The evidence of climate change and especially the reports of the Intergovernmental Panel on Climate Change (Intergovernmental Panel on Climate Change, IPCC) have shown that drastic interventions are needed to contain these changes to below two degrees Celsius, as set out in the Paris Accords. It is also established that the costs for the community associated with climate change would be much greater than the investments needed to avoid them.
In addition to the contrast ai changeclimate change, the international community is also committed to climate change Sustainable Development Goals (SDGs) of the United Nations, a collection of 17 interconnected global goals, covering environmental, social and gender equality aspects, designed to achieve a better and more sustainable future for all.
La pandemic crisis has made these goals even more urgent, highlighting how substantial investments should be made to facilitate the transition towards a clean, resilient, sustainable and inclusive economy.
Also for this reason, sustainable finance has been talked about more and more in recent years, as well as ethical finance. However, the two terms are often not clarified or overlap and refer both to financial products and to a different way of doing finance.
In the opinion of the authors, there was no academic text that went beyond the list of good practices or general statements and went deep describing how this new interpretation of finance works. To circumscribe the field of work and to help clarify, we have chosen to write on ethical finance, even if many of the operating practices described can also be implemented in sustainable finance products.
Despite the fact that the products of the sustainable finance approaches in spirit to ethical finance, the big and fundamental difference is that an intermediary of ethical finance is responsible, towards society and the environment, at 360° and not just for a part of its activities. We therefore clarify in the volume how the ethical finance intermediary who operates correctly is, due to its DNA, exempt from practices of green- Or social washing, which instead can be presented through traditional financial intermediaries who, perhaps, complement truly “sustainable” products with others that contradict social or environmental responsibility.
The text is organized in such a way that the first chapter, edited by Pedro Sasia, clarifies what ethics is and how it interacts with economic action, while the second deals with how ethics has been applied to finance, in history up to nowadays. The three central chapters represent, so to speak, the “engine block” of ethical finance: how it operates in financial intermediation (with a focus on microcredit), in investments and therefore in its organizational methods. Chapter 6 discusses the measurement of impacts, a topic on which there are already specialized texts. Finally, the conclusions indicate some of the future challenges for ethical finance.
Before starting, however, a quick examination of the financial criticality given that ethical finance, and implicitly with it sustainable finance, also arise from a strong criticism of traditional finance.
Let's make it clear right away that neither the usefulness nor the effectiveness of finance itself is called into question, which represents a fundamental tool for the correct management of resources. Finance affects us all: for our daily actions and for the enormous influence it has on political and private choices globally and locally. On the contrary, the current problem is that a large part of the current financial system has lost sight of its social purpose of favoring the meeting between those who have money available and those who need it for their activities. From a tool at the service of the economy and for the "optimal allocation of resources" in the production system, finance has transformed into an end in itself, with the sole objective of making money from money. Today we are experiencing the paradox of excess liquidity on the one hand and financial exclusion on the other at the same time. One example among many possible: through derivative instruments I can bet on food prices, but millions of small farmers - in the North and in the South of the world - who produce that food are unable to have access to credit or financial services. Furthermore, that self-referentiality has led finance to operate without scruples in search of short-term profits in "predatory" ways (think of mortgages subprime) which have contributed to increasing inequalities and social exclusion, the exact opposite of what a “just finance” would promise.
The tension between financial capitalism and productive capitalism, already well described by Keynes, is much stronger today and the financial system has enormous inconsistencies.
Very schematically these can be summarized in 5 macro areas which are briefly set out below:
- Is global finance a free market?
This is a legitimate doubt given that the number of significant operators capable of controlling the main financial exchanges are only a few dozen and directly or indirectly control annual financial volumes which are estimated to be tens of times the world GDP. Furthermore, for years financial regulation has not been proportional to the size of the operators with a single idea of regulation (one size fits all) which does not favor the diversity of operators, contributing to aggregations that lead to operators "too big to fail".
- Out-of-control financial leverage and financial hypertrophy
The volumes of the derivatives markets, currency trading are huge and difficult to estimate. In fact, there is an excess of liquidity that is directed to these markets rather than direct investment in productive activities. The leverage effects that can be obtained with financial instruments and with current practices can be very high, giving rise to systemic risks (think of mortgages subprime and the market for credit default swaps associated with them).
- There is a theme of fiscal opacity
Not only for the tax optimization practices of multinationals, but also for tax avoidance through Chinese box mechanisms and tax havens. It is a sector in which finance plays a crucial role not only because it is obviously used but also because it often actively builds opaque practices.
- Lawlessness and finance
Obviously, the large illegal capitals use finance by exploiting its opacity for their purposes. However, the large financial companies themselves are often at the center of scandals over illegal actions and over the years have been hit by gigantic fines (for billions of euros each), for anti-competitive activities, market distortion, money laundering of illicit origin (even from drug trafficking ).
- Speculation at the speed of light
Finally, speculation that has always been present in finance is now reaching worrying heights thanks to artificial intelligence applied to financial exchanges. Today with the fast trading finance thousands of speculative operations can be carried out per second by exploiting real or even induced market fluctuations by creating volatility with binary options. A speculative activity that drains resources from the real economy and can cause heavy repercussions on the community.
Every single operation linked to the above criticalities can be explained in financial logic, but the complex of criticalities and above all the volumes of money involved increasingly distance finance from the utilities it could directly or indirectly generate for the community.
The central theme is the (ancient) debate on the connection or otherwise between economic choices and socio-environmental impacts. In this sense, ethical finance represents a new fundamental criticism of the laissez faire: the "supra-social" role of finance does not make it more neutral with respect to social and environmental repercussions as, for example, the climate crisis has shown.
In this debate, the encyclical of Pope Francis is having great influence in the financial world Laudato si ' which explicitly speaks of the ability to measure socio-environmental impacts and to evaluate one's economic efficiency on these parameters.
We are therefore witnessing a new attention to issues of social and environmental impact on the part of investors retail and institutional. As a result, in recent years many financial institutions present themselves as champions of the green or theimpact investing often, however, limiting themselves to offering a range of sustainable products or simply talking about responsible finance because some securities have been excluded from investments.
Here, if you want to make finance sustainable and address the critical issues highlighted above, something much more drastic and effective is needed. In this road ahead, surely ethical finance can play a fundamental role. This book helps us understand how it works and what innovations it has already generated.
°°°The book will be presented and discussed on 4 November 2021 from 14 to 16 pm at the Lumsa University, room 6, via Pompeo Magno 28, Rome
