October 15, 2024
Financing the future
From short-term profit to long-term positive impact creation: Why reforming the financial, monetary and banking system matters
"Without transforming the monetary system, major socio-ecological crises cannot be addressed. It is in the nature of money that conditions must be created to ensure that it does not take on a life of its own, but rather serves society, which is its purpose, and not the other way around, where we serve the monetary system."
Dr. Katrin Käufer, Presencing Institute and MIT, Geldgipfel co-kreativ - das Lab 2024 Oktober 2024, Video-Podcast 'Ist Geld zu effizient?' (translated)
Click and watch the 1st hand experience that Katharina Kurz, co-founder and directrice of BRLO, shares in this videopodcast
BRLO, founded in 2014, is a Berlin based brewery and gastronomy company that stands for modern beer diversity and distinctive experiences.
"Building a brand sustainably is no standard venture capital case"
"We have used all kinds of financing options, whether it's bank financing or leasing. The partnerships with banks are rather standard, of course with great partners, but there's not much co-creation involved... We have external shareholders, financiers, investors, or in the beginning, business angels, as we called them. There aren't many, just a handful, and it has always been important to us that they share a long-term vision. We never saw ourselves as a standard-venture-capital-case, because that always comes with a fixed timeline for when the return must be realized, and accordingly, the pressure increases. It takes time to build a brand sustainably, especially in a challenging market like beer and Germany, and that's why it's important to us that our investors are a good fit for us."
Katharina Kurz, co-founder and directrice of BRLO, Interview September 2024 (translated)
What is a regenerative finance?
Regenerative finance
- uses money as a tool to address complex and intertwined crises like climate crisis and social inequality
- serves the economy by guiding financial flows towards positive impact creation: e.g. renewable energy, regenerative agriculture, healthcare and education.
- prioritizes long-term positive impact creation, related to environmental sustainability and social responsibility for all stakeholder over the traditional focus on short-term profit for shareholders and speculative realm.
- models and services are part of a systemic change with environmental, social, and governance (ESG) factors and policies no longer accepted as isolated corporate initiatives but embedded into strategies, business models, operational and financial decision-making and is committed to involve core stakeholders in decision-making.
- goes beyond impact investing that aims to create positive impact on one or more ESG related dimensions along the value chain while earning a meaningful return
"Since the emergence of monetary flows, there have been attempts to 'limit' money. Three core aspects of the nature of money explaining that limiting money was always an aspiration: 1. It's a social contract, a human invention; trusting the financial construct is fundamental. 2. It translates value into price. A qualitative description of something is turned into something quantitative; things we value become marketable through pricing. 3. It is too efficient for the real economy, i.e. a transaction in the real economy takes time, while a transaction in the financial world happens in a blink. Money is the joker in the system. With money everything is possible, it is unlimited, while the real economy is limited."
Dr. Katrin Käufer, Presencing Institute and MIT, Geldgipfel co-kreativ - das Lab 2024 Oktober 2024, Video-Podcast 'Ist Geld zu effizient?' (translated)
Today, impact investment faces greenwashing and impact measurement challenges. However, connecting money with impact is not a new invention
Impact investment history as presented by Dr. Katrin Käufer @ Geldgipfel co-kreativ Lab 2024
Early forms:
Religious restrictions, self-help, lending communities; credit unions in the 19th centuries, cooperatives
1970-1980:
Microfinance; socially responsible investing
1990s:
Triple bottom line by John Elkington: people-planet-profit
2004:
ESG principles by the UN
since 2007:
Impact investment initiated by the philanthropic sector (Rockefeller foundation). Now a investment class considering risk, return and impact
"Profit and impact can't be maximized at the same time."
Sebastian Klein, Serial entrepreneur and 'Tax me now' member, Geldgipfel co-kreativ - das Lab 2024 Oktober 2024, Video-Podcast 'Ist Geld zu effizient?' (translated)
Main objectives?
- From short-term profits to long-term positive impact creation that benefits environment and societies. A straightforward and in many cases disruptive move
- From degenerative to regenerative businessmodels. The key factor of disruption is no longer coming from the market -like competitors etc- but from early stage environmental collapse. Embedding environmental, social, and governance considerations into all levels of strategic, operational and financial decision-making is key. No greenwashing but
- sustainable (zero-harm), restorative and finally regenerative (net-positive)
- Mobilizing investment and financial processes aligned with UNs Sustainable Development Goals (SDGs) and the planetary boundaries framework and supporting systemic change, i.e. initiatives to addressing causes
BUT
Why does it matter?
Which hidden barriers and underlying dynamics are impeding a healthiy approach to financing the future?
What can we do to overcome them?
Why does it matter?
"The allocation of capital is one of the strongest determinate of the future society that we create. Who gets a loan, who doesn't, who gets equity, who doesn't, really determines the kind of future we are creating. We need to think about how we allocate capital in the context of the current climate crises, and we need to act quickly. This is an emergency that won't be fixed by bailouts and interest rate tweaks. But it can be effectively addressed by sustainable finance."
Tamara Vrooman, CEO Vancity Credit Union, cited by Dr. Katrin Käufer and Lillian Steponaitis, Presencing Institute and MIT, in Just Money: Mission-Driven Banks and the Future of Finance, MIT press, Feb 2021, p
Banking at its core is about collectively moving capital into the future we envision: So, whether you are interested in environmental change, social inequality, economic instability or the community you live in. Reforming the financial, monetary and banking systems towards sustainable financing and viability is crucial for all of us to embrace change. It ensures that financial practices and services contribute to long-term environmental, social, and economic sustainability, aligning with global goals and investor demands. Moreover, it mitigates systemic risks and promotes innovation, leading to a more resilient and equitable global economy.
Positive impact financing
Fighting climate change
Urgency: Climate change and environmental degradation are among the most pressing global challenges. The financial system plays a critical role in either exacerbating or mitigating these issues. Reforming financial practices is essential for steering capital towards projects with positive impact.
Impact: By directing funding away from fossil fuels and towards green technologies, the financial system can significantly contribute to achieving international climate targets, such as the Paris Agreement's goal of limiting global warming to well below 2°C.
Promoting fairness and equality
Positive impact finance also means investing in ways that help people/communities, like improving access to education and healthcare. This can reduce social inequalities and lift up communities that need it most.
Ensuring long-term stability
A focus on regeneration makes the economy stronger and less likely to crash during crises. It prioritizes long-term impact over short-term profits, referring to business models that are an integral part of nature and society.
Encouraging co-creation and innovation
Reforming finance brings countries and companies together to solve global problems. It also sparks new ideas and products, to support a healthier planet and society.
Offering new financial services
Governments and international institutions are pushing for more regenerative practices. By reforming the financial system, new financial options and models can meet the growing demand from investors who want their money to make a positive impact.
Hidden barriers and underlying dynamics impeding a healthy approach to financing the future
"It is important to recognize that intervening at one level is insufficient, and a holisitic approach is necessary to realign the financial system to support a regenerative economy."
Tom Jess, Peter Blom and Sandrine Dixson-DeclèveI Nov 2023I From financing change to changing finance I The Club of Rome p.8
The authors address six main barriers, respectively design flows of the current financial system that prevent it serving the transformation of the economy: mis-placed purpose (role of finance), narrow notions of value (goal of finance), out-dated analytical frameworks (tools), flawed mathematical models (methodologies), passive mode of operation (agency of finance) and lack of relational finance (relationships and organisation)
Cultural resistance
Financial institutions are in a very powerful position. Everybody needs access to finance. However, traditional financial practices and mindsets are deeply ingrained, impeding the transition to sustainable and beyond impact models.
"Changing the financial sector's deeply entrenched focus on short-termism requires not just new regulations but a fundamental shift in corporate culture," said Christine Lagarde, President of the ECB, in 2023
Short term profit in the financial and economic world
Despite the disruptive moment,
-- many financial institutions are more involved in intransparent, speculative financial activities than in the real economy, creating an artificial and inflated financial economy.
- many companies remain focused on quarterly earnings, which can undermine with long-term sustainability goals. Environment, Society and Governance principles are treated separately, in silo corporate social responsibility activities and not as core of the business model.
Lack of impact measurement standards
make it difficult for stakeholders, especially investors among them to assess achievements.
"The absence of a global ESG standard remains a significant barrier, leading to greenwashing and investor skepticism," stated Frank Elderson, ECB Executive Board member, in a 2023 speech
Lack of moving beyond standardized financial products and services
Today standardized financial products are mostly focusing on profit and circling in the speculative realm. Moving beyond that i.e. developing banking services that use finance to bring ideas addressing the complex challenges to life and serve nature and society as a whole is still rare. It requires a change in perspective: The self-interest doesn't end at the end of the organization but becomes bigger and includes the impact on society and nature.
Regulatory challenges
Varying regulations across regions create complexities in implementing adequate financial practices
Hidden barriers and underlying dynamics are powerful so what can we do to overcome them?
We cannot afford rest-stops or detours or stumbles at this half-way point in humanity's climate journey. Climate change impacts are not isolated events. They transcend political boundaries, damaging economies and causing cascading changes to our societies and culture, with children and the most vulnerable bearing the brunt. We need every country to have a plan by 2025 and make progress on implementing them by 2030. I urge you to come together, and to overcome differences. This is not a moment for trying to try, but for finding solutions and forging pathways forward.’
Simon Stiell, UN Climate Change Executive Secretary, speech in June 2024
What is the role and purpose of finance? - A reset
The Global Alliance for Banking on Values (GABV) is a network of 70 independent banks using finance to deliver sustainable economic, social and environmental development.
Beyond strict exclusion criteria and a sustainable product offering, GABV members intentionally use finance to tackle social inequality and environmental challenges.
'Change finance' in practice - A set of principles
1 Triple bottom line (by John Elkington): People-planet-prosperity, at the core of the business model
2 Real economy: Grounded in the communities, serving the real economy, enabling new business models to meet the needs of both
3 Transparency: Transparent and inclusive governance
4 Long-term resilience: Resilient to outside disruptions
5 Client centered: Long-term relationships with clients and a direct understanding of their economic activities and the risks involved
These five principles are embedded in the culture of the Global Alliance for Banking on Values (GABV), in which banks work together to change the banking system itself. For more click here.
Education, awareness and progressive ideas - Operating in complexity requires different mindset, approaches, models and tools!
Increasing awareness, education for all stakeholders: civic society, research, politics, business, non-profits...E.g. Money summits like Geldgipfel co-kreativ - das Lab 2024
Steward-ownership
A corporate ownership structure presenting an alternative to shareholder value primacy. Ensuring organizations prioritize their long-term purpose over short term profits by two principles:1I Self-determination, i.e. the power is held by people directly connected to the company‘s mission and ops and cannot be speculated with and 2I Purpose-driven: value created in the company can not be extrated by shareholders. Profits are reinvested.
E.g.
Bosch (Germany), Globus (Germany, Patagonia (US)
Double Foundation Model separating money and power: Control rights with managers functioning as stewards for the company and a charitable organization holding the economic rights and the capital shares of the company
Policies, regulations and governance
Governments and international organizations are working to create policies and regulations that promote regenerative finance and prevent impact washing.
E.g.
- EU Green Deal: The European Union's Green Deal, with a budget of €1.8 trillion (including the NextGenerationEU recovery plan), aims to make Europe the first climate-neutral continent by 2050
- In 2023, the EU introduced the Corporate Sustainability Reporting Directive (CSRD), which mandates comprehensive sustainability reporting from large companies and listed SMEs, affecting over 50,000 firms across Europe.
Collaboration initiatives - all levels
Some examples:
- UN Principles for Responsible Investment (PRI) encourage global collaboration and the sharing of best practices in responsible finance: As of 2023, the UN PRI had over 5,000 signatories globally, managing assets worth $140 trillion
- The European Climate Pact, part of the European Green Deal, fosters collaboration among governments, businesses, and citizens to achieve net-zero emissions by 2050, with over 1,000 initiatives launched across the continent by 2023
- The business round table in the USA, a consortium of the 100 largest businesses, redefined the essential role corporations can play in improving the society and having a positive impact on long term value-creation in Aug 2019: CEOs need to be truly comitted to meeting not only the needs of their shareholders but all stakeholders: customers, employees, suppliers, communities
It starts with you: By gaining clarity about your attitude towards money, you empower yourself to take action
The time for incremental change has passed as we are facing a polycrisis, i.e. a cluster of distinct crises that interact in ways they and their effects tend to reinforce each other, like climate change, social inequality and economic instability.
We are in an early stage of an inevitable and irreversable ecological collapse. This is already tangible: Nearly 500 Million people, especially living in the global south, are affected by loss of livelyhoods, loss of life, armed conflicts, diplacements, national bankruptcies and lack of access to healthcare. Up to nearly 4 Billion people (50% of the world population) are already affected by immensily rising costs of living and food prices.
The current relationship between finance and economy is creating a negative impact as finance is usually focused on short term, high profit for shareholders and a speculative realm.
The financial system needs to focus on the long-term value creation for all stakeholders, that encompasses addressing complex challenges, serving the real economy, considering positive impact in everything we do. It is a fundamental shift of the way we handle money, investments, policies and funds.