Keith Skeoch spoke about the ‘ESG Enlightenment’ and the power of finance to translate ordinary people’s savings into a powerful force for good in the world.
In the latest Radical Old Idea session from the Global Ethical Finance Initiative, the former CEO of Standard Life Aberdeen and interim chair of the Financial Reporting Council sat down with Royal London Climate Change Lead Kaisie Rayner to discuss the legacy of capitalism, the challenge of the climate crisis and what we can learn from Adam Smith. Watch the session now, or read the summary below.
At the start of the session, the audience of finance sector experts were polled on their views around sustainability. Over 40% of respondents said that their organisations had only started putting sustainability into their decision making in the past 5 years, with a further 17% saying that they had yet to do so, while 75% of respondents felt that the finance sector was not on track to support the massive economic transformation needed to deliver climate action.
Capitalism has, over its 400 year history, been a success story, argued Keith. It has collectivised savings into a force far more powerful than individual savers could ever be. “There has never been a more important time to invest in your future and the economy’s future and it’s your savings that will facilitate those investments”, said Keith, adding that this was “a story you only usually hear during wartime.”
Reflecting on Boris Johnson’s recent claim that greed drove the development of the new COVID-19 vaccines, the former Standard Life Aberdeen CEO agreed that it represented a victory for capitalism, but argued that the real story was the success of regulated capitalism, not unfettered greed. By tailoring the approval process for the vaccine to the unique circumstances we find ourselves in, the state and the market worked together for the good of humanity.
This is a story, as Keith and Kaisie discussed, that would have been familiar to the intellectual father of capitalism himself, Adam Smith. While some of Smith’s modern advocates paint him as a proponent of pure, unregulated capitalism, this was far from the truth. Smith’s most well-known work is the Wealth of Nations, but he also wrote at length about ethics in his other great work, the Theory of Moral Sentiments, which provides the moral purpose to the Wealth of Nations.
The point of the metaphor of the invisible hand – which he only used once in the entire Wealth of Nations – is not that markets should never be regulated for the good of society; in fact, Smith was in favour of this. Seen in the context of the fragmented markets of his time, the metaphor was simply an argument not to restrict foreign trade.
In fact, context has often been a driver of economic theory, suggested Keith. From Keynes’s response to the Great Depression in the 1920s and 30s, to Friedman’s theories about runaway inflation in the 1970s, economics has always responded to the situation it finds itself in. Ironically, however, in the years since Smith, average long-run growth rates have remained roughly stable. More than anything else, economic theory has affected the distribution of resources in society, rather than the total size of the pie.
While theories have responded to economic stimuli, over time they become intellectual straitjackets, confining thinking to a narrow policy paradigm until an external shock forces a re-evaluation. With the instability we have seen over the past few year, Keith argued that, in fact, “time is ripe for a fundamental paradigm shift” in economics and finance. The question, he suggested was “what should be the future of the new policy paradigm”, outlining 5 key factors needed in this new paradigm:
- Economic models which reflect the relationship between finance and other parts of the economy
- A responsible and sustainable corporate sector
- A view of regulation as something which helps markets by aligning them to the public interest
- A recognition that good behaviour minimises the cost of regulation by building trust
- A finance sector committed to putting substance into the mantra of “build back better”
Finance has a huge opportunity to make a difference as we build back better. It is the only way we can build trust and the only way that it will be delivered is by everybody taking personal responsibility: sustainability is everybody’s business.