CHAPTER 10
A Silent Revolution Is On
Rebooting finance means putting all the malleability and inventiveness of this tool back to work for the common good. It means using it wisely, reorienting the compass, getting it back onto the right course, giving it the right signals. We can’t ignore or diminish the force of the market, the influence of investors, and the desire to be profitable. Instead, these forces need to be channeled for the better (rather than the worse). Further, we can’t deny the immense energy of finance—we must harness this, too, borrowing its coding and using its protagonists (leading and incentivizing them in a different, new way) to manage investments in viable projects that give us a sense of the future. Numerous ideas, innovations, and initiatives have emerged with this goal in recent years that demonstrate just how useful finance can be, perhaps even more useful than we dared to imagine. We need to talk about these ideas a lot more and in terms easily understood by nonexperts. By showing in stark terms how finance is being developed to address some of the world’s most pressing needs, we will aid in its rehabilitation. We also have to launch the various initiatives on a massive scale—as massive as we can manage as investors, savers, clients, and retirees. Then we’ll see that our 2015 goals are totally within reach. Perhaps one of the least understood factors is that our generation is at a point of inflection where we can make a step change by using finance as our servant to drive wholesale changes.
The Silent Revolution of the Markets
The social and solidarity economy is today in turmoil. Forums, test labs, and new approaches abound around the idea of intelligent, ethical finance that is socially responsible and capable of shedding the tyranny of quarterly results and thinking in the long term to build sustainable plans for humanity. Concepts like economics of mutuality (promoted by Bruno Roche and Jay Jakub1), a circular economy, impact investment, green bonds, and shared value no longer cause smirks and eye-rolling: the financial innovation logic they embody has sparked real interest not only from experts but also from public authorities and investors. Around the globe, many of these concepts are already working diligently to promote capitalism with feeling. A new financial system must be able to integrate this, without being naïve, into the new products and markets that follow.
HEC Paris’s Finance 4 Good, Stanford Graduate School of Business’s Impact Funding Lab and Responsible Business Lab, and Oxford University’s Impact Investing Programme are just a few examples of the world’s most prestigious schools positioning themselves at the head of the movement. In an example that reflects on the economy of mutuality, HEC Montréal created the International Research Centre on Cooperative Finance, for example. Rym Ayadi, its director, explained: “The race towards a homogeneous financial system . . . proved to be at odds with the nature of the system which is, in essence, diverse in many aspects. Diversity results from the co-existence of more than one organizational form of finance, such as shareholder versus stakeholder-value financial institutions. Each one has its own incentive system and view about the way it contributes to the economy and society as a whole.”2
Other fascinating initiatives are also under way to apply the concept of shared value proposed by Michael Porter, professor of management at Harvard and director of the Institute for Strategy and Competitiveness. This idea is far more engaging than corporate social responsibility, which has been adopted more or less voluntarily by organizations and which has led to accusations of opportunism in many cases. Instead, a company can take it one step further, Porter says, by “generating economic value in a way that also produces value for society.”3 More than simply protecting the environment from its impact and arming itself against the related negative externalities, a company can reshape the direction of its operation and integrate consideration for the needs and expectations of society into its strategies by refreshing its products and services to adapt to social needs, increasing productivity in its own value chain (through the commodities market, for example) and contributing to the creation of hubs, such as Silicon Valley in California or the many competitive clusters that already exist in France.
Today, shared-value initiatives are being used within many companies in a variety of sectors, from pharmaceuticals to banking to food production. The application of this concept to the banking industry, in particular, leads to imitation:4 several large banks like Barclays, ING Group, JPMorgan Chase, Crédit Agricole, and Société Générale are understanding that their clients, ranging from the biggest institutional investors to businesses, jump at offers that respond to the new alternative energy market, from housing development to agricultural development. These social and environmental markets, increasingly seen as “profitable” with respect to the size of demand,5 are major opportunities for banks to create shared value. They can increase profits while also reaffirming their raison d’être of serving the economy and society and financing solutions to local and global issues.
Dear Investors: On Social Impact
Another revolutionary approach has a bright future: social impact investment, also called, more simply, impact investment. It encompasses “all investments that deliberately aim at precise social goals as well as financial returns, and which measure the accomplishments made with respect to each.”6 It is clearly significant that the promoter of this idea, Sir Ronald Cohen, the wealthy British businessman who founded Apax Partners (a private equity firm), is also considered one of the founding fathers of venture capital and private equity—in other words, a model of traditional finance became the figurehead of new finance. This is surely a sign. As we once discussed: “Basically, the 19th century was the age of return (the main question being, how much will my investment bring me?); the 20th century was the age of risk-return (will the return on my investment be enough to justify the risk I take?); and the 21st century appears to be the age of risk-return-impact (how much am I risking, how much can I earn, and what is my impact?).”
In short, we have moved from a two-dimensional to a three-dimensional vision of the financial market, in which investors are dedicated to concentrating on our ability to construct a better society, to everyone’s benefit.
The latest novelty in this innovative approach to finance is the social impact bond: following green bonds, social impact bonds (first introduced in the United Kingdom, then launched into many other countries) are a “nontraditional form of debt issued by a state (or a public borrower) without a fixed interest rate but for a predetermined period in which it commits to paying for a significant social improvement [such as reducing the recidivism rate for prisoners] for a defined population.”7 This concept of social finance, initially developed to manage long-term social problems (like absenteeism, illiteracy, recidivism, and social exclusion), now tends to expand into domains such as education or public health, to benefit the most fragile populations (such as youth, the elderly, the disabled, or the homeless).
These new approaches to finance are in no way utopian. Impact investment is growing rapidly in the market. This type of investment has already allowed us to make advancements in reducing recidivism and improving healthcare for children and the elderly, and in financial inclusion, even if programs are not linear and some failures have been registered. Initiatives like the ones launched by Coca-Cola in Brazil and by Danone in Bangladesh have created local value and jobs.8 In the wake of COP21, we saw a record volume of green bonds being issued worldwide in the first quarter of 2016 ($16.5 billion in just one quarter) by multilateral issuers (like the World Bank or European Investment Bank), large-scale enterprises (EDF Energy, Unilever, Air Liquide, Apple), and medium-size companies.
Without great fanfare, a revolution is taking place: as Cohen says, impact investment “brings the invisible heart of markets to guide their invisible hand.”9 Finance has the great advantage of being a flexible system that reacts mechanically to incentives. We just need to give it good incentives, such as the requirement that the impact of investments made on behalf of the client of a bank or a fund be positive, and that stocks bought be of social or environmental benefit, in order for the system to turn in the right direction. This linkage is sometimes misunderstood or creates mistrust in the public sphere. That is why it seems so urgent to me that we explain all the strategic roles of investors better. COP21 gave us a lesson by demonstrating that private and public players can work hand in hand. Now, we need to improve our application of this approach.
Finance and Climate: Toward a New Community of Shared Destiny
While the silent revolution stirring the markets has a special role to play in the fight against climate change, the discussion on climate has, to a certain degree, only emphasized the well-understood drag created by finance. Let’s not kid ourselves: the $100 billion in public aid promised each year from North to South, an obligation of solidarity, will not by itself make a difference. The Copenhagen Summit of 2009 treated this amount as symbolic of our collective commitment. But $100 billion per year will not suffice to reduce the footprint of a global economy of $100 trillion. This transformation can happen only with market mobilization, and therefore with a change in the behaviors of the players involved.
Already, we are seeing an increasing number of companies and shareholders take the climate dimension into consideration when they choose investments and savings, market their products, and set up their accounting systems. More and more investors, in particular, are “greening up” their stock portfolios by withdrawing investments from carbon (as Amundi, a subsidiary of Crédit Agricole, did in 2015) and hydrocarbons (like the Rockefeller Foundation did in 2016, when it sold all of its shares in ExxonMobil) to redirect their money toward projects related to the energy transition. In 2014 Engie, a French electric utility, issued the largest volume of green bonds ever made by a private actor to date (€2.5 billion) to finance wind power, hydroelectricity, and energy efficiency. In October 2015, EDF Energy also distinguished itself by issuing a green bond for a record dollar amount of $1.25 billion. What’s new is that these choices are not purely ethics based, but are also financially sound: “It makes little sense—financially or ethically—to continue holding investments in these companies . . . [that] continue to explore for new sources of hydrocarbons,” the Rockefeller Family Fund stated on March 23, 2016.10
Financial risk has effectively come of age. Economic actors can no longer ignore the “transition risk” described by Mark Carney, which threatens nothing less than global financial stability:
Take, for example, the IPCC’s [Intergovernmental Panel on Climate Change’s] estimate of a carbon budget that would likely limit global temperature rises to 2 degrees above preindustrial levels. That budget amounts to between 1/5 th and 1/3 rd [of the] world’s proven reserves of oil, gas and coal. If that estimate is even approximately correct it would render the vast majority of reserves “stranded”—oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics. The exposure of . . . investors, including insurance companies, to these shifts is potentially huge.11
If these financial budgets, which today represent trillions of dollars in the global economy, were to devalue quickly, the world could experience a devastating crash. Given such conditions, Carney concludes, “financing the de-carbonization of our economy is a major opportunity for insurers as long-term investors.” The fates of finance and the climate are, from here on out, connected—whatever comes to pass. Markets therefore have an interest in projecting as far into the future of this transition as possible. As Carney said, “The more we invest with foresight; the less we will regret in hindsight.”12
In any case, Carney places the responsibility for providing a compass to the actors squarely upon policy makers, by making greenhouse gas emissions costly according to a fixed-price scale. This type of indicator would, by its nature, have a gradual influence on behavior. It would give the market the signal to do the necessary work by validating alternative energy in the long term. Companies, investors, and consumers would have all the items in hand to direct their choices to the benefit of greener solutions by incorporating a carbon tax into their economic models and project plans. “These carbon price mechanisms should not be considered a check on the global economy,” explained Engie’s president, Gérard Mestrallet, in 2015. “Quite the contrary—they will be a necessary accelerator of growth by creating confidence, stimulating investment and innovation, while setting up the conditions for fair competition.”13 This is one of the most powerful illustrations of the value that finance, properly applied, can be a creative force for the short-range, mid-range, and long-range future. By sending the right signals through an appropriate regulatory framework with the requisite degree of supervision and measurement, we can harness the energy of finance for the common good!
But Does It Scale?
The possibilities of using finance for the common good are just about limitless, in theory. I have personally been convinced of that since at least 2002, when I was a member of the World Panel on Financing Global Water Infrastructure working group led by Michel Camdessus, then again by his side in the office of the French president, and worked on many projects central to development finance.
Financing Access to Water
It was in the working group that I first experimented with financial innovation for the common good, beginning with universal access to clean water. Our working group quickly came to realize that nothing was as it seemed, because the common wisdom is that water is a gift from God, one of the most sacred resources. Too bad God didn’t think to make the plumbing needed to distribute it! The needs in this field were massive: $180 billion per year to achieve the Millennium Development Goals, or twice as much funding as was then being made available (and nearly twice the total of contemporary official development assistance).14 Of the 84 measures proposed in our study “Finance Water for All,” the idea of a “sustainable tariff on drinking water” was the one we pushed: “To resolve the enormous financial problem, we must first turn to the most legitimate resource we have to use: self-funding, through a reasonable and efficient tariff policy,” or in other words, a “realistic and socially applicable” policy. We were inspired by a successful experiment in South Africa, which drew on the principle that it made sense to pay higher rates for water used to fill a swimming pool or wash a car than for the water used to quench thirst. We suggested that the first few cubic meters of water should be free, and any above that would have a price. In this way, we defined a “tariff principle for the sustainable recovery of costs,” using tariff formulas that attempted to “account for the abilities to contribute of different segments of the population” in order to grant the poorest “a much better service at an equal or lower price.”15
A Small Levy on Plane Tickets
I was able to test out another intelligent use for finance as rapporteur-general alongside Jean-Pierre Landau, inspector general of finance, on the 2004 study Les nouvelles contributions financières internationales (New international financial contributions, also called the “Landau report”) on financing global solidarity.16 This is one of the innovations I am most proud of, because the creation in 2005 of the “Chirac tax” on airline tickets allowed us to solidify on a global level the idea of responsible globalization. Back in 2002, at the international conference in Monterrey on development funding, the president of France, Jacques Chirac, reminded us: “[It is] natural to envision the financing of humanization and the mastery of globalization through exactly that wealth which it engenders. We must therefore think more about the possibilities of international taxation for which the proceeds would be added to official development assistance.”17
The idea was to invent an international fiscal policy that, by its leverage, would allow us to find the indispensable resources for development funding while minimizing the individual effort for consent. The importance of such an approach is also that it guarantees predictable and perennial resources that are not subject to the whims of parliamentary and democratic votes.
In 2003 the president of France assigned Jean-Pierre Landau and me to the task of putting together a working group embracing different points of view (from ATTAC [Association for the Taxation of Financial Transactions and Aid to Citizens] to the IMF, the Ministry of Finance, the French Development Agency, Sir Tony Atkinson, and Oxfam). The highest-level experts, including economists, financiers, and tax specialists, were tasked with evaluating the feasibility of multiple options in finance innovation from a practical perspective, particularly the different possible forms of international taxes: microtaxes on financial transactions, taxes on foreign capital entering or leaving a tax haven, green taxes on ocean and air transportation, tiny pay-as-you-go taxes on airline tickets, and so on. It was this last option that we kept, for purely practical reasons, specifically because its implementation didn’t create technical difficulties in collection, and also because of the connection between air transportation and globalization. With the effects of scale (at the time, 3 billion airline tickets were sold around the world each year), a universal and painless contribution of one dollar per ticket would have brought in, without compromising the economic balance of the industry, at least $3 billion.
This is one of the most extraordinary powers of finance: it allows, through the mechanism of a marginal charge on an economic activity, the widening of the solidarity base and the funding of a public good by mobilizing a fraction of the new wealth created by globalization, a large part of which had eluded state taxation systems. In this case, the Chirac tax on airline tickets allowed us to raise nearly €2 billion for the fight against AIDS and large-scale epidemics. France, along with about a dozen other countries, set up a partnership to allocate this money for the creation of an international center for medication purchases, dubbed Unitaid, which has become one of the pillars of financing access to healthcare worldwide. As a purchasing hub, Unitaid benefits from strength on the market to negotiate significantly lower prices with pharmaceutical companies. More than 80 percent of its budget goes to low-revenue countries.
Mobilize Today for Future Commitments
The Chirac tax is an even more interesting financial innovation when paired with another kind of innovation involving financial engineering. The idea, advanced by the United Kingdom, was to create a “simplified international finance” apparatus to pull together sustainable resources to fund vaccinations. The formula was that if a number of countries committed to donating 10 units per year for 10 years, we could recognize these multiyear commitments, mobilize the money immediately on the market (meaning, 100 units today), and reimburse the apparatus with future payments. Rather than giving a smaller amount each year, the funding efforts of states participating in the apparatus could be concentrated at the start by borrowing against the promised future amounts. That way, we create a much larger mass effect and quickly get noticeable results. That is how the International Finance Facility for Immunization (IFFIm) came about in 2006, with the mission of issuing equity bonds on financial markets regularly through the multiyear commitment of 10 states.18 The funds raised were reinjected into the Global Alliance for Vaccines and Immunization, a public–private partnership delegated with the administrative functions and on-site implementation of the projects funded. To date IFFIm has collected $5.2 billion. Between just 2006 and 2008, this mechanism contributed to saving the lives of 3 million people living in developing countries! It is not just public reengineering of fiscal policy, which would not be new, but a genuine combination of efforts of all kinds.
Finance Controlled by a Firm Hand: The Sky Is the Limit
Finance can be used to set up an extraordinary and effective mechanism in a number of fields of application, allow bulk buying and advance purchases, and generate leverage. In the healthcare field, for instance, financial experiments have been conducted by modern philanthropic organizations like the Gates Foundation: by introducing guarantees into the market for vaccination, it allowed wide-scale use of vaccines and low-cost distribution in developing countries.
Along with Jean Todt (president of the International Automobile Federation, former CEO of Ferrari, and special envoy of the UN for road safety), I am leading discussions on ways to use financial mechanisms in the same vein. Road safety is an issue that affects more people than AIDS. On a global scale, 1.3 million deaths per year and 50 million injuries occur on the roads, the majority of which affect poor countries and pedestrians (many of whom are children: 500 kids die each day from traffic accidents). The difference with road safety, of course, is that we know the remedy: awareness campaigns that educate users of roads about the laws; enforcement of speed limits and laws against driving while under the influence of drugs or alcohol; improvement of radar, sidewalks, and speed bumps; and upgrades in public lighting. None of this is particularly expensive, but it could save hundreds of thousands of lives.19 In order to consistently fund these solutions, we could come up with a microlevy or a microcontribution on automotive products—beginning with cars (80 million are sold each year), from which a “painless” contribution of just five dollars could sustainably generate hundreds of millions of dollars.
Similar ideas could be implemented in other fields like education. I am currently working on this topic with Gordon Brown, UN special envoy for global education, as well as the creation of the International Finance Facility for Education (IFFEd).
Financial players all need to do a much better job of communicating how each of these initiatives is working and the irreplaceable role of finance in their functioning. The appropriate combination of various facets of finance—collecting, mobilizing, and combining public and private resources and capacities—is required to address needs in an efficient manner. At the same time, we have to keep innovating, sourcing ideas from different stakeholders and then using the right mechanisms to test them quickly to see which ones warrant rolling out at scale. In Chapter 11, I look at one of our strongest forums for such tests, the multilateral institutions.
In Part 3, we will see how this controlled approach of finance can help restore trust in the multilateral system as well as foster a genuine cooperation between nations to serve the common good.