After having spent his early career in the City of London, Tony Greenham now leads the finance and business research team at the New Economics Foundation. He talks here about how he lost faith in the unfettered capital markets, what it will take to transform the mainstream banking sector, the value of his involvement in the Transition Towns movement, and why we need “investment grade” policymaking.
Nothing in Tony Greenham’s early career would have suggested he would one day find himself leading a research team at the New Economics Foundation, a think tank whose stated mission is to challenge the very bedrock of mainstream economic theory and practice. After earning a BA in Politics, Philosophy and Economics at Oxford University in 1991 during Thatcherism’s hay day, Greenham worked as a chartered accountant with PricewaterhouseCoopers in London and went on to become a banker in the equity capital markets division of Barclays where, for many years, his faith in the unfettered capital markets remained largely intact.In the late 1990s, however, after Barclay’s investment banking division was sold to then Credit Suisse First Boston, Greenham found himself beginning to question that belief. “The approach and philosophy that bankers took to their job during what was then the dot.com boom was increasingly distasteful to me,” Greenham recalls. “I began to see that markets were dysfunctional and that people involved in them had no idea at all about serving any greater good. It seemed the entire justification for any action you might take was to maximize your own financial position.” Increasingly disillusioned with its culture of greed and short-termism, Greenham left the City of London in 2000 just before the dot.com bubble burst, having concluded that it was no longer a place he wanted to pursue a career.
Greenham had scarcely given a thought to the broad issues of sustainability, climate change, or the ecological impact of economic activity during his years in the City. But a chance reading of British architect and urbanist Richard Rogers’ Cities for a Small Planet changed all that. “That book made me look outside the narrow confines of a traditional view that an economy just had to liberate people to maximize economic growth and everything would be fine,” he reports. His interest in alternatives to mainstream economic thinking evolved further after he returned to academia to pursue a masters degree in Environmental Assessment and Evaluation at the London School of Economics, where he embarked on a course of reading and reflection that began with E.F. Schumacher’s Small is Beautiful. “It was the beginning of the journey that led me to do what I do now at the New Economics Foundation,” says Greenham.
After leaving LSE but before joining NEF to head up its finance and business research activities, Greenham became involved in the Transition Towns movement, a UK-based grassroots network focused on local solutions to climate change, peak oil and economic regeneration that has gone viral in over 900 communities around the world. Greenham says his experience with the Transition movement has contributed inestimably to his theoretical work at NEF. “There is a whole culture of politicians and advisors and think tanks that sit in the bubble world outside the real world and it is easy to get sucked into it,” he notes. “With the Transition Towns movement you work connected with communities. You come to understand that people often respond emotionally rather than rationally when they are issued warnings about things like climate change. Those insights are invaluable when doing policy work because, after all, what we are trying to do at organizations like NEF is change the real world, not write textbooks.”
Tony Greenham on Why We Need Investment Grade Policymaking
Markets and prices do not tell the whole story. Important social and environmental information is often missing from markets and this is why we often get poor social and environmental outcomes. This observation is not controversial and has been long observed by economists, who use the term "externalities" for these un-priced impacts.
It’s not that we don’t have a way of valuing externalities, we do have tools that can put these on the balance sheet, but the problem is there is no real reason for companies to do this. If you put the value of negative external impacts in the annual report of a publicly traded company it is largely ignored because what investors care about is cash flow and if it doesn’t impact cash flow it is not material to them.
Another disconnect between markets, and financial markets in particular, and the needs of society over the long-term is the effect of using interest, or discount, rates in valuation models. This has the very real effect of devaluing the needs of future generations relative to the potential profits today, and can lead to today’s apparently profitable investments coming at the expense of future societal wellbeing.
The question is; how can these social and environmental considerations best be reflected in markets?
The technocratic answer is to attempt to alter market prices using taxes or subsidies to correctly account for externalities. But this is not always possible in theory or practice. Redesigning financial markets without interest rates is theoretically possible but seems equally intractable.
Another more practical answer is to recognize that economics is not as divorced from politics as its practitioners often claim. Democratically determined political imperatives should set a direction for markets, and in particular for infrastructure investment, that takes account of social and environmental outcomes and the needs of future generations. Only then can we can harness the power of markets for the public good. Investors need this to be executed in a stable policy environment in order to not create unnecessary uncertainty and risk. You could say that the market needs ‘Investment Grade’ policymaking from the political system and this is often lacking.
A case in point is the reaction of analysts to the Carbon Tracker initiative, which attempts to create a narrative of a “carbon bubble” risk to the financial system. As it becomes recognized that it will not be possible to extract many of the petroleum assets now on the balance sheets of energy companies without catastrophic climate consequences, the carbon bubble could burst with wider damage to the financial markets. This is about significantly overvalued carbon assets on balance sheets and it has profound implications for the London Stock Exchange, which has become the listing authority of choice for every oligarch with a coalmine, somewhere.
But when Carbon Tracker put this forward there was a hostile and dismissive response from banks and brokers because they simply don’t believe there will be any political action on climate change, and therefore the carbon will all be burned. The stock market valuations correctly reflect the political deadlock and inaction over climate change.
Another example is what happened to investment in offshore wind power in the UK, which has tremendous potential wind energy resources. Negative remarks about renewable energy by a government minister at a party conference sent investors fleeing from a sector that requires long-term investment horizons. That is a rational market reaction to the political narrative, with a real impact on investment and jobs.
Can we really blame markets for this? I think not, but perhaps more importantly this shows that markets can very much be part of the solution, but only if we recognize that it is we who are the master, and markets are the servants. But the master has to show strong and determined leadership.
Greenham’s current work researching the global sustainable banking movement is now affording him ample opportunity to reflect on what it will take to transform the mainstream banking sector—an active and intentional integration of social and environmental values into business practice. Unfortunately, he notes, none of the reforms put forward by European or North American policymakers have started from a definition of banking that makes any reference to social justice or ecological limits. “My view of what banking should become is that these goals must be explicitly woven into the mission statement of all financial institutions so that they might actually become part of the solution instead of part of the problem,” says Greenham.
He cites Germany’s Sparkassen, savings banks that are governed in the public interest although not state owned. These banks have explicit social as well as financial objectives and by charter must lend, invest, take deposits, and offer universal banking services only in a particular local region. “You can see in pure economic terms that these banks have a very positive influence on the local economy and in terms of social impacts,” says Greenham. “They prevent people from falling in with illegal money lenders and they tend to be quite responsible in the way they market credit. The Sparkassen are real world examples of good banking practice where there is an explicit focus on social values that has created profitable outcomes. These banks may earn only 6 or 7 percent on equity compared with the 12 percent or more targeted by shareholder owned banks but they made it before the crisis and have carried on making it through the crisis as the giants of global finance crashed into large losses.”
Greenham also takes the view that regulators should require banks to report details of every project to which they extend financing as a first step to giving the public an understanding of the environmental and social impacts of their core business practices. “When you challenge a bank or bank regulators on this point they say it is not the job of a bank to dictate the behavior of its client companies. I just think that is an odd view,” he says. “It is a bank’s job to manage the risk of the people it is lending to. To say that the social and environmental impacts of their clients’ activities have no bearing on that risk is simply bad business, let alone an abdication of responsibility in a moral sense.”
It’s Greenham’s maintains that a real reform of the banking system will not take place before another systemic financial collapse. “Who knows what might prompt it but it will be required before people really start with a clean piece of paper and say this isn’t working, we need to radically restructure,” he says. “The reaction to 2007-08 has been tinkering at the edges. Stopping large banks having proprietary trading desks is good but does it change much overall? This does nothing to curb useless speculative activity elsewhere in the system. If Goldman Sachs invents a new derivative product and someone wants to buy it then the conventional wisdom is that no one should stand in the way of that. It is capitalism. A real shift in that mentality will take another crash.”
Greenham also falls into the camp of those who are skeptical of technological fixes to climate change and resource scarcity. Nor does he believe innovation will allow the economy to continue on an infinite growth path. “Holding that belief has profound implications for interest-bearing debt and the growth economy required to sustain it,” he notes. “ A growth economy can mask an awful lot of societal problems. It allows you to put off addressing issues like the distribution of wealth and income and the distribution of power within an economy. If you take the view that the economy cannot continue to grow exponentially you have to really confront the idea that consumers in the west are going to have to consume less to leave space for consumers in the east and south to consume more. That is quite an explosive message and not a popular one. But I think we need to confront that reality and have an honest discussion with ourselves in the wealthy northern and western countries.”
Greenham sees a business as usual future characterized by a continuing deterioration of financial and economic security and real income for the ordinary working family. “The focus for the world economy over the next 15 years has to be about sharing resources more equitably,” he reports. “We can’t paper inequities over with exponential growth hoping that if everyone gets just a little more everyone will be happy. So the issue will be how can what we already have be more equitably distributed. There is always the danger that people will say that to get growth going we need to cut the size of the state, deregulate everything, cut welfare programs and that will make us all richer. That is the debate that is now playing out. If the latter free market economics wins then everything will get a whole lot worse before it gets better.”