Transcript Financialization 101 - Climate Finance and Markets

Financialization 101
Facilitator Name, Group
Date
in collaboration with the Institute for Policy Studies
and the Heinrich Boell Foundation
Objectives
• Define and describe the differences between
commodification, privatization and financialization,
and how they are related.
• Identify the impact of financial trends on resource
management and access.
• Begin to develop a shared analysis of how
financialization could impact climate-related
decisions, and some alternatives to financialization
as a management or capital generation tool.
Introductions
• Name
• Country/region
• Affiliation (movement, organization, etc.)
• What are the climate-related fights, projects,
policies or institutions that you work on?
• Additional objectives for today?
Guiding questions
• What are commodification, privatization and
financialization and how are they different?
• How does financialization impact the way that
decisions are made about natural resource use and
public benefit?
• How could financialization impact the way
participants develop campaign and advocacy targets,
strategies and tactics?
• What are existing and proposed alternatives to
‘financialized’ approaches?
financialization
No one definition, but financialization …
• Describes the increasing dominance of the
financial sector in the sum of total economic
activity, and the tendency of even “real”
producers to seek profits from transactions on
capital markets
• Describes the greater role of capital markets in
our lives, how decisions are made, and how
resources are managed
financialization
ecological
instability
real economy
financialized
economy
internalize ‘value’
through pricing
investment
opportunities
needed
“nature”
commodities
financialization of nature
the “real” economy
• Trade in goods and services to meet people’s
need and wants for things like housing,
clothes, widgets
• State provides essential service to citizens
• Regulated financial markets and financial
institutions provide money to produce what
people need
financialization
ecological
instability
real economy
financialized
economy
internalize ‘value’
through pricing
investment
opportunities
needed
“nature”
commodities
financialization of nature
the “financialized” economy
What are the trends?
• 1990s – deregulation of banks, rise of market-based
regulations
• Financial sector share of economy growing
(16% in 1970s, 41% in 2008, 33% in 2012)
• Trading money, risk and associated products is a bigger
and more profitable portion of the economy than
goods and services
• Greater variety, complexity of financial instruments
(derivatives, repackaged debt, etc), speculation
• More market power in the hands of financial sector
• Greater financial ownership of resources
financialization
ecological
instability
real economy
financialized
economy
internalize ‘value’
through pricing
investment
opportunities
needed
“nature”
commodities
financialization of nature
the search for profitability
•
•
•
•
2000 - dot.com bubble
2005 - real estate bubble
2008 - food & energy bubble
2010 - Eurodebt bubble
Falling returns = search for new markets
Coming resource scarcity = potential profit
connecting to
the financial crisis
David Harvey, Crisis of Capitalism
http://bit.ly/eimpjK
financialization
ecological
instability
real economy
financialized
economy
internalize ‘value’
through pricing
investment
opportunities
needed
“nature”
commodities
Financialization of nature
ecological instability
The creation of value shifted from intrinsic use
to value from the extraction and production of
goods – eg. wheat grown for food sold as
bread for money
The invention of the economy as a separate
sphere from nature saw no particular value
assigned to environmental harm or health.
“Climate change is a result of the greatest market failure that the
world has seen” – Sir Nicolas Stern
A failure to account for the full economic
value of ecosystems and biodiversity is a
significant factor in their loss and
degradation. Without value there is “an
effective 'zero' price” - The Economics of
Ecosystems Biodiversity (TEEB).
financialization
ecological
instability
real economy
financialized
economy
internalize ‘value’
through pricing
investment
opportunities
needed
“nature”
commodities
financialization of nature
putting a price on nature
Solution – internalize costs of environmental harm
through pricing
• Pollution
• Ecosystem services (ex. carbon sequestration)
• Physical resources (ex. water)
Pricing could mean taxes, fines, trading – it’s the
process of financialization pushing pricing toward
trading
financialization
ecological
instability
real economy
financialized
economy
internalize ‘value’
through pricing
investment
opportunities
needed
Creation of
“nature”
commodities
Financialization of nature
commodity creation
• Create new commodities (carbon, ecosystem
services, etc.)
• Build a global market - make commodity
tradable, standardized etc. (case of physical
infrastructure for gas)
• Create scarcity in the market - laws are key, or
oligopolistic approach (major oil traders are
investment banks, control of storage companies, etc.)
financialization
• Commodification – commercialization of something not
generally seen as a product, becomes an asset, turns inherent value
into market value, enabling it to be bought and sold on a market
(widgets vs water)
• Privatization – transfers control and management of these
commoditized resources from public ownership to private ownership
• Marketization – commodity is priced and market created to trade
new commodity
• Financialization – financial instruments applied to an underlying
asset (commodity) that’s in the market (speculate on derivative value of the
underlying asset/resource)
• Valuing isn’t commodifying – but in a
neoliberal ideological and institutional
context, the one tends to lead to the other.
“Valuing ecosystem services” quickly leads
to the production of new “ecological
commodities.”
“I expect to see a globally integrated market for fresh water
within 25 to 30 years. Once the spot markets for water are
integrated, futures markets and other derivative waterbased financial instruments...will follow. There will be
different grades and types of fresh water, just the way we
have light sweet and heavy sour crude oil today. Water as
an asset class will, in my view, become eventually the single
most important physical-commodity based asset class,
dwarfing oil, copper, agricultural commodities and precious
metals.”
-- Willen Buitler, Citi chief economist
financialization
ecological
instability
real economy
financialized
economy
investment
opportunities
needed
internalize ‘value’
through pricing
“nature”
commodities
Financialization of Nature
the risk
“Subject the natural world to cost-benefit
analysis and accountants and statisticians
will decide which parts of it we can do
without... All that now needs to be done to
demonstrate that an ecosystem can be
junked is to show that the money to be
made from trashing it exceeds the money
to be made from preserving it.”
- George Monbiot
the results
•
•
•
•
•
Higher food, energy, and metal prices
More volatile prices
Increases demand for land
Price discovery ruined (markets don’t work)
Hedging no longer possible/worthwhile
WEED, Aug 2011
http://bit.ly/118lb2m
dramatic increase in speculation
price increase and volatility
financialization
Stop the Takeover of Nature by
Financial Markets
AttacTV, June 2012
http://bit.ly/118czsA
Break!
financialization of climate finance
How does the process of financialization and
trends in the financial economy relate to how
climate funds are being designed?
a financialized frame
• Narrative – there’s no public money, we need
private sector
• Leverage scarce public money and institutions
to move private capital
• Reduce risks for private sector to invest
• Use private equity funds to raise money
• Attract institutional investors (pension funds)
• Relax investment rules in South countries
green climate fund
private finance
Ambition - main global fund for climate change finance and to catalyse
additional public and private finance at the international and national
levels.
Private Sector Facility (PSF) - bring private sector initiatives into the scope of
international cooperation on climate change, catalyse additional and
complementary finance.
• The facility will also support activities to enable private sector and capital
markets involvement.
Exploring two distinct but possibly complementary approaches
• mobilize private finance alongside GCF funding at an operational level by
providing funding directly or indirectly to private sector entities
• directly sourcing private financing into the Fund, such as investments from
institutional investors - pension funds, Sovereign Wealth Funds and
others.
business model questions
private sector facility
• What is the institutional and governance model for the PSF? Should it be
organized as a specialized unit in the Fund or a separate institutional
structure organized as one or several investment vehicle(s) for venture
capital, private equity and others like the Global Climate Partnership
Facility, including entities such as KfW and EIB?
• Will the PSF take a phased approach with indirect funding through
financial intermediaries initially and then direct funding to private sector
in future, like the International Finance Corporation?
• Would financial draws to the PSF include public finance in line with a Fund
allocation system or should the PSF have a separate financial input?
• How will the PSF manage information disclosure and conflict of interest
issues as it relates to private investments?
business model questions
private sector facility
• How will country ownership and transaction costs be addressed for PSF
supported activities?
• What will be the fit between PSF supported activities and country
planning processes?
• What flexible financial instruments will the PSF employ (concessional
lending, non-concessional lending) for proving direct and indirect funding
to private sector players?
• How would the PSF be more effective at mobilizing national private sector
actors in developing countries, especially in LDCs and SIDS?
• Will readiness support for local industry and other grant-funded activities
be managed through the PSF or through the windows?
• How would the PSF policies and procedures be different from public
sector operations?
the reality
Lessons from development finance
1. There is the risk of public resources being wasted
–on viable projects which commercial banks would have financed anyway, or
which companies could afford to do themselves -- the ‘windfall’ problem,
non-additional
–On projects that get no private interest because they are poorly conceived
or unprofitable – leading to failed projects
2. Private sector funds are profit driven, not needs driven
–crowds into medium income countries
–crowds into mitigation, sidelining adaptation
–favors large, centralized projects
3. Using financial intermediaries poses challenged for
transparency and accountability
alternative strategies to
financialization
• Regulation – permission, prohibition, standard
setting, enforcement
• Commons management
• Public Public Partnerships
public climate finance framework
It’s time for an alternative narrative!
• There’s an abundance of money (look at bank
bailouts, military budgets, etc)
• We need to look at all sources on the table
• National governments responsible for meeting
climate finance commitments
• Flow through a fund that’s designed to meet
the needs of people
what does this mean for GCF
advocacy?
• What are our demand for GCF?
• What do we need to add to our climate
finance principles to address financialization?
• What have been the best financing models to
deliver support to communities?
• Design ideas so that GCF is needs driven, not
profit driven
Evaluation
• Did we meet our collective objectives?
• Did you meet your personal objectives?
• What did you like about this workshop?
• What would you change?
Thank you!