Regulating international finance for social progress and to protect the environment

Frédéric Hache explained the current dynamic in which new asset classes for investors are being created through the expansion of financialization of nature and human life. He problematized the concept of natural capital. That is the process through which nature is being reconceptualized into a set of measurable services that benefit human life for the consequent creation of financial instruments that allow financial investors to trade those services. He explained how natural capital does not represent nature since our ability to account for all the complex processes and set of interdependencies in nature is highly limited. Instead, what is measured is an extremely simplistic abstraction of nature that only considers certain elements, while leaving others out. In addition, Hache explained the further complication of putting a price on those services as the methodologies available are beyond simplistic and biased. The concepts of natural and human capital, and their derived material consequences, set dangerous precedents by equating incommensurable elements of life into profit-cost-risk calculations. Consequently, these processes have the sole purpose of expanding the frontiers of capital accumulation and economic growth. 

One of the most interesting points of the talk was about the importance of framing when talking about how to regulate international finance for social progress and to protect the environment. According to Frédéric Hache, to accept the framing that finance has a role to play implies “to have already lost the battle”. Accepting the frame, according to Hache, will shift automatically the public debate away from the need for appropriate environmental binding regulation towards secondary topics about finance (amount of subsidies, levels of transparency, etc). Finance-based regulations are justified under the banner of “they are better than nothing”, obscuring the fact that they do not happen in a vacuum, and certainly not in addition to other types of regulations, but instead of. Citing Latour, what is needed is not to regulate finance, but less finance. That is, to broaden the scope by which we look at and analyse the world through introducing alternative languages of valuation beyond finance-based solutions. 

During the discussion, we talked about how binding regulations should be the pillar of environmental protection and not the subordinates of market-based instruments. An interesting contribution asked for the drivers behind investing in coal plants in the Global South, to which Hache pointed out the climate-agnostic position of finance and its sole focus on profit returns and risks. Daniela Gabor’s Wall Street Consensus was summoned during the discussion when bringing up the new role of the State and multilateral institutions – IMF or World Bank – as de-risk agents for global financial investors. Two dimensions were highlighted regarding this issue: (1) Emissions off-setting mechanisms; and (2) climate change adaptation financial instruments – such as catastrophe bonds – by which high-risk is allocated to the government while Wall Street assumes the low-risk part of the financial instruments. 

We ended on a more positive note by highlighting the importance of decrypting complex financial terms and preparing pedagogical material around these issues, concepts, and narratives. The objective being to raise awareness and promote quality discussions between highly informed citizens.

Written by: Mario Diaz Muñoz

Based on the lecture "Regulating international finance for social progress and to protect the environment" by Frédéric Hache during the AEMS Summer School 2021