Rethinking economic and financial models in a post-Covid world

Sandrine Dixson-Declève shares how the pandemic has enhanced the resilience of economic actors that embed wellbeing indicators into their models.

Sustainability expert Sandrine Dixson-Declève is the Co-President of the Club of Rome, an organisation founded in 1968 to define comprehensive solutions to the complex, interconnected social and environmental challenges of our world. In this interview, she analyses the impact of Covid-19 on global economies and financial systems – and explains how to rebuild them better.

The Covid-19 pandemic is putting unprecedented economic stress on the private and public sectors worldwide. In this context, when the immediate concern is liquidity and survival, will companies and governments have the bandwidth to continue focusing on their sustainability – specifically environmental – transition?
S.D.-D.:  Covid-19 is definitely putting a huge economic stress on the private and public sectors. This means we need to ensure that we build resilience into our financial system so as not to continuously fight through disaster, but actually prepare and design our system against future shocks. I’m convinced that going back to business as usual and bailing out high-carbon producing industries and “hard-to-abate” sectors (like the aviation sector, car manufacturers and the fossil fuel industry), is not the right way forward. The only path to follow is to stop investing in stranded assets – such as infrastructure that uses fossil fuel reserves, particularly coal – and instead move on to building the decarbonised infrastructure that we need to meet our climate neutrality goals in Europe and the Paris Agreement goals globally.

The current crisis has left deep disparities in the economic landscape, causing many activities to sink and some to prosper: what lessons, if any, should economic actors draw from this?

The Covid-19 crisis has demonstrated the relevance of a sustainable business approach: the companies and countries that already started to shift away from stranded assets are actually the ones that are showing more resilience in the crisis.

S.D.-D.: The Covid-19 crisis has demonstrated the relevance of a sustainable business approach: the companies and countries that already started to shift away from stranded assets are actually the ones that are showing more resilience in the crisis. For instance, countries with economic models that have wellbeing indicators rather than GDP as their main economic indicator, such as Iceland, Scotland, New Zealand, Finland and Costa Rica, are emerging from the acute phase of the crisis with less economic hardship than other countries that are still stranded in the fossil energy, hard-to-abate sector economy.

In the short term, when economic actors rethink their activities and financing models around more sustainable frameworks, social and environmental objectives are not only complementary, but also more innovative and more resilient across their value chains in the long term. There are many examples now of how to build back better, whether this is through doughnut economics, which looks at the existence of people within the planetary boundaries, or through wellbeing indicators.

Greenhouse gas emissions are heading towards a tipping point. This is being driven by the loss of the ice sheets and the subsequent thawing of permafrost, which will generate massive GHG leakage. We still have around 10 years to change the GHG emissions trend in order to avoid irreversible, dramatic damage: how can we incorporate the impact of climate risk into business models?
S.D.-D.: Decarbonised economies will be the next powerful economies. But on a macro level, the transition to low-carbon economies is extremely complicated politically and requires stronger collaboration between policymakers and business leaders.

To ensure a just transition, social and environmental externalities must be internalised. For this, the right taxation frameworks are necessary, such as carbon taxation, while shifting taxes away from labour to products but this is extremely complex if not applied on a global scale. Can national governments alone set up a full and ambitious framework to tackle the situation? I don’t think so, but that doesn’t mean they shouldn’t try, and bring others along with them. Regional and supranational organisations obviously have a role to play in order to make this a success and ensure there is a more level playing field between players.

On a micro level, the role of scientists, economists and experts at large is key to incorporate the impact of climate risk into regulations and business models.

How could finance advance this transformation?
S.D.-D.: If we are truly going to emerge from emergency, we need the finance community – both private and public finance – to work with policymakers and scientists. Together, we can make a difference. But this can only be done collectively, and we need to up our game: a significant reallocation of trillions of dollars will be required if the Paris Cop 21 goals are to be achieved. This is why in February 2020, the Club of Rome launched its Finance Impact Hub.

What are the objectives of the Finance Impact Hub initiative and how do you intend to reach them?
S.D.-D.: We aim to trigger a shift towards the wellbeing-based and decarbonised economy that I’ve been describing above. To this end, not only do we need to ensure that we finance the change — pulling out of stranded assets, shifting our capital into low-carbon production and services — we also have to work on changing the finance system into a value-based one.

Decarbonised economies will be the next powerful economies.

We will do this by bringing experts in finance together with those from other disciplines and with policymakers. This will enable us to identify the key shifts that we need over the next 10 years of action. The discussion will focus on putting in place the right criteria, using taxonomies or harm-reduction approaches. This shift has to be a concrete one, and must be fully embedded in the economic system’s movement towards value-driven investment.

This is what our work will be: with policymakers, in particular at the European level for the moment, but also with the international financial institutions (IFIs) and multilateral development banks (MDBs), we’ll be tackling three key areas, at least in the short term:

  • The first one will consist of furthering commitments to divest from fossil energy and high-carbon infrastructure, while working very closely with the European Investment Bank (EIB).
  • Our second task will be to look at a way to address the recovery through debt swaps at the international level: for example supporting efforts with developing countries and IFIs on “debt- for-nature” swaps (financial transactions where debt is forgiven in exchange for against a commitment to protect nature).
  • The third area will be shared with the banking community, with Triodos Bank at the helm, and will work on responsible banking. BNP Paribas is of course expected to take part in this work to construct a new, value-based banking.

As you can see, the aims of the Club of Rome’s Finance Impact Hub are to drive change in the short term that will enhance a long-term systems shift. There is a great deal to do, especially post Covid, to build greater resilience in our economic and financial systems to guarantee healthier lives and well-being as we prepare for future shocks. We see that as banks are still the bridge between people and their financial security and personal investment choices, they must be part of this new value proposition for people, the planet and prosperity. Our goal is to also work with banks to help build this important role.

About Sandrine Dixson-Declève
Sandrine was recognised by GreenBiz as one of the 30 most influential women across the globe driving change in the low-carbon economy and promoting green business. She is the first female Co-President of the Club of Rome (1968), sits on several Boards, is a senior advisor/Senior Associate for CISL, ETC, Interel and E3G, and is a lecturer at the University of Cambridge. She also holds several advisory positions within the European Commission.