From financing change to changing finance with Peter Blom and Till Kellerhoff

From Financing Change to Changing Finance

Today’s financial system extracts value from natural, human, and social capital while increasing the gap between rich and poor. This has significantly shifted the interaction between financial and economic systems from ‘finance supporting the economy’ to ‘the economy supporting finance’.

In this episode, Till Kellerhoff, Program Director at The Club of Rome, speaks with Peter Blom, former CEO of Triodos Bank, member of The Club of Rome and chair of the Club of Rome Rethinking Finance Hub, about the urgent need to transform the financial system. They explore the transition from financing sustainable projects to changing the financial paradigm itself, the concept of financialisation, and how it impacts the real economy, ecological health, and social equity, as well as the possibilities and obstacles in achieving these transformations.

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Full transcript:

Till: Welcome to the Club of Rome Podcast, exploring the shifts in mindset and policy needed to transform the complex challenges we face today. My name is Till Kellerhoff. I am Program Director of the Club of Rome and leading the Reclaiming Economics Impact Hub. I am very pleased to welcome today Peter Blom. Peter is the former CEO of Triodos Bank, which won the Financial Times sustainability bank of the Year award in 2009 and has become a global reference for value based banking. Peter also founded the Global Alliance for Banking on Values in 2009 and was the chair of the board in 2021.Alongside many other things, Peter is a member of the executive committee of the Club of Rome and Chair of the Rethinking finance Impact Hub, which aims to contribute to the evolution of the financial system so it can serve the transformation of our economy to achieve human well being within planetary boundaries. Welcome Peter.

Peter: Thank you for being here.

Till: Thank you for joining. And let's start with a general question on the Club of Rome to which you became a member in 2015. What motivated you to join the Club of Rome back then?

Peter: Well, what motivated me to join was actually the invitation I got, and I was very surprised by that. And what I was surprised of that people said to me from the Club of Rome, you're relatively young. I just had then become 50, but anyway, you have a good track record, so we are very happy to have you in the club. So that was I felt very honored as an as a useful new member to the club, and really was happy that I could contribute to the to the thinking of the Club of Rome. What in that time, was not so exposed anymore as it was in 1973 when I read as a very young guy, this first book, Limits to Growth. But I've seen in the last, I would say, decades two decades, that there has been an increasing interest in the Club of Rome thinking. And that we are very doing very well in transforming this idea of limits to growth, so a more system change approach what is needed today and tomorrow.

Till: Very good. And you mentioned the Limits to Growth, already published in 1972 by a group of MIT researchers, and the Limits to Growth spoke about the material limits to growth on a finite planet. Now your background is in banking and finance. What is the connection of finance and the financial system to this boundaries of growth on a finite planet?

Peter: Yeah, actually, if you look back at this report, it's it's quite a linear approach. It's not a circular approach at all. It's a quite linear approach. But first we had to be more conscious and aware of the linear limitations of our system before we could really think about the circular approach we need today. And in banking, it's very important, and finance very important that you don't look only to the next two or three months, although that happens more and more in banking, but the next 5 to 10 years. So limits to growth, what is possible, how you can grow your business in a sustainable way, is highly relevant for banks. It was already in the 80s, when I started my career in banking, but it's even more today. So circular thinking, not only counting on growth, also considering that substitution from non sustainable business to more sustainable business is a very important aspect of banking today, and so I think the club of Rome's thinking about system finance is highly relevant for the financial industry, the financial sector.

Till: And you mentioned already, one point of finance very often connected with is that it demands short term financial returns. Before we come to the broader systemic shifts of the finance system, is it even possible as kind of one player to change the game? So if the rules are in such game that they value short term returns, how easy is it to change that as one player in this industry?

Peter: I think you cannot change yourself the whole system as one single financial institution. That is one of the reasons where, when we founded this Global Alliance for Banking on Values, I realize already, uh, 20 years ago, that we did quite well and grew very well as a bank, that just being one bank growing is not enough to change the system. Maybe with an alliance, we could contribute, and I think that is happening at the moment. At that I'm also very happy that the Global Alliance is so successful at the moment. But I think what you can do is stretch. You can say from getting even more short term. You can make it slightly more longer term, and can make clear that maybe it's not the next year you're only looking at, but the next five year, the next seven years, maybe the next 10 years. But you can never say, Well, I only look at the long term and not at the short term. Banking is looking at both. But many banks forgot about the long term and only looked at the short term. I think that's what we corrected, in a way, by the practices of Triodos Bank, and I must say, where many other banks also are looking at because they also can see that the system is much more vulnerable than it was maybe 20, 30, years ago, where you really couldn't count on linear developments what you really can't anymore today.

Till: And we saw the vulnerability of the banking sector in the crisis, 2008,  2009. Do you think regulations were put in place that changed the system to the better since then, in the sense of the banks that were too big to fail, in the sense of the public having to buy certain banks out of that, did regulation and governance pick up on that issue?

Peter: Let's stay positive. It helped. It helped to calm down things, to create bigger buffers for the banks, what was good. But they did not change fundamentally the system. So it was still possible to create more money, to create to grow faster the financial sector than the real economy, what, in itself, brings a lot of vulnerability into the whole system, including the society and what we having to deal with as people. So I do think it helped, and we learned from it, but not fundamentally. Fundamentally. We have to look much more closely to what is the role of banking and how can it? How can we make it much more structurally supporting the real economy, instead of making it less vulnerable and slightly more more stable compared to what it was in the past?

Till: Yeah, and you mentioned that certain changes and improvements might have happened, but not on a systemic level. And I think that's one of the goals many Club of Rome members could subscribe to, right achieving something like well being for all within planetary boundaries from a systemic level. How helpful do you say now the financial system today is in achieving this goal, achieving well being for all within the planetary boundaries?

Peter: Well, I think what is a very important notion in this whole financial debate, I would say, is that you can talk about finance change, and that's what we learned as banks. We really started to focus on different asset classes, made some parts of the economy greener. Also thought it was a very interesting new sector for the banks. But what we didn't look at as if on a financial system level, in change finance. How do we change the finance system altogether so we can more, structurally avoid that we are still financing brown assets and not green assets. How do we not continue to tweak a little bit the current system while we are not really addressing the more systemic questions?

Till: It's not enough to finance change, but actually to change finance, and that was the title as well, of a paper you co authored last year entitled From financing change to changing finance. And one of the starting points there is that you speak about the financialization of societies. Could you briefly explain what that financialization is and maybe also how we got there?

Peter: I think if you look at the volumes in the financial sector, you see an incredible growth where in the banking sector, in let's say, in the in the Western world, it was only a percentage of the gross national product. What we did in the financial sector, in banking, and now we have sort of three, four times gross national product. So the importance of the financial industry has become major. We depend on it with our pensions. We depend on it as businesses, citizens, for taxes and so forth and so on. So we financialized a lot of things, and we became dependent on it. And it's a little bit abstract. What do we mean by that? And I think many things we take for granted now and who function in the real economy sphere have been discovered by financial institutions, by asset managers, including CO2 carbon emission markets and biodiversity, and you name it, everything can be financialized and be brought to a market. And I think we have to think much harder about where a market is a good thing to help to allocate resources, and where markets only create more dynamics and more growth and actually create a problem because there is a market for it. So I think that is something, what the Club of Rome should do really make clear where markets work and where they don't work. It's very clear it's too easy to create markets for financialized products, and biodiversity is one of them they're thinking of at the moment. And it's not because we think we can help by the biodiversity to grow. It's more to make money out of it. And that is in itself, a real unbalance in the system. And that's where the cup of Rome has a role to play to to reveal what is this unbalance? What does it do? What are the wrong side effects of that.

Till: So when you mentioned the financial markets and finance kind of outgrowing the real economy to a certain extent, who is benefiting from that and who isn't benefiting

Peter: To a certain extent on the short term, we all benefit from it. It creates money for the system, and people can spend that. But what you see as a real big issue is the difference between asset owners and non asset owners. It's the inflation of asset prices what creates, really the divide between the haves and the have nots. You can see it in Western countries. You can see it on a global scale between emerging markets, poorer countries and Western countries. When you have certain assets you can value, then you are well off, because, in a way, they follow the money in that sense, and then people are secured. Simple, if you are renting a house, you have a real issue. Rent go up every year. If you buy a house and pay off your mortgage, your assets become more and more and more valuable. So you see really a social divide between the haves and the have nots. And I think that's a real, serious problem we should avoid. And that is what financialization and fast growing markets creating too much money in the market, what it does really, it's not stable. It makes the differences much bigger than we want them to have, and that creates unrest on a global level, also on a national level, even on a very local level. And all the unrest, people get more fearful. They don't know, can they live tomorrow? Can they live next year? And therefore, the real serious questions like the climate change, like biodiversity, like resources questions are not taken serious enough, because it makes people think and feel more short term, and that's a really, really distractor from looking at the real issues we have to look into. So it has a big effect indirectly, on dealing with the bigger issues, I would say.

Till: And now you already mentioned the interests in the game, why people want to increase the value share, the value asset, looking for that. Now being coming from a Club of Rome perspective, we know it's usually not the individual, but individuals behave according to incentives the system gives them. And Donella Meadows, basically one of the main authors of the Limits to Growth, always thought about the leverage points in a system that can change these incentives and that can change then also individual behavior. What would you say are these leverage points in the rethinking finance dimension to really achieve system change and not just individual change?

Peter: Well, I think what is so interesting about the approach of Donella Meadows is that she, she really not, is saying, well, it's only about big, big ideas, paradigm shifts. It's also about changing the practices day to day. And on the spectrum of the 12 levels of Donella Meadows, I think you can see the whole spectrum of finance change to change finance. And I think what we have been trying to do with our paper and and with us many others, like the Bill Bretton Woods movement and so forth and so on, we have tried to bring it more up off the ladder of Meadows and think more about the paradigm shift that is needed. What means a new approach to money, a new way of thinking about money, a new way of looking at what the role is of financial institutions. I think there are many things we just need as businesses in the real economy, but finance is something we have created, and it's sort of gone out of hand.  We now have to sort of re look at it and say, well, in what service do we have, actually these financial institutions? Can they be privately owned? One of the questions we also raise in our paper, it's very common that it's privately owned when those goes well, so privatized profits, socialized losses when it doesn't work anymore. We need them for our system, for our structures, and then the government have to come in, we as a community have to come in to save them. And I think that is the sort of thinking we have to look more, consequently, into it. And I think many bankers actually understand that, and many financial people understand that, but it's only the problem with money. It's so easy to make money with money that it's very hard to say goodbye for that and make a financial system what does not count anymore with double digit profits, but make reasonable profits, who match the profits of a real economy in average.

Till: And you make a very good point on the privatising wins and socializing losses, which also shows that we often speak about bubbles and specific aspects of the financial system and disconnecting the financial system to the real economy. However, when bubbles explode, the links to the real economy are still very clear, because it affects the whole economy, right? So it is a very embedded in a very complex system. And describing what you just described, the diagnosis demands for change. In the paper, you write that the diagnosis requires more than tweaking the current system, the sustainable finance or green finance policy agenda should be aiming for transforming the system itself. What are the differences between these things like, what's the difference between greening and system change in maybe some also concrete examples, like, where do you see some minor improvements, incremental changes that might, however, not be enough for the real system change we need to see in order to make finance serve planets and people.

Peter: I think what you see now that by new government regulation, like the taxonomy in Europe, we have we, we see that we force banks, financial institutions, to take a better look at the green aspects of of the assets they finance. But what would be much more structural if you say, Well, if you continue to invest in brown assets, you really need a higher capital ratio. You cannot use the same capital ratio for brown assets financing as green. And that is now coming more to the consciousness of regulators. Central banks talk about it already. They didn't do that five years ago. So things are changing. So that's what I mean by really structural changes. You make clear that it's not just about a nice marketing tool to look greener what is very easily become green washing, but make very clear that it's too expensive to continue to finance on such a big scale, brown assets, and if you do that, you need a lot of capital, and you cannot make the return you need as a bank. So going to green assets is a more structural approach if you relate them to the capital requirements. That's one example. You could also say, well, for banks, we need different., andthat's that's a much more fundamental question that you could say, maybe banks cannot be listed companies anymore. Maybe they should be more companies who are in the commons. The commons, who is really a structure for public private interest, and that we have to define much better. What is the public interest, what is the public cost and the public benefit? And where can you bring in private investors? We haven't thought about that. I think cooperative banks are a good example. They have really the opportunity to look more from a commons perspective for their role. And I think steward ownership, enterprise, foundation owned banks, I think is another alternative.

Till: What are then the barriers of implementing systemic changes? Because you mentioned, you know, many bankers understand the value of the green transition, but obviously there are very, very, very strong interests opposing this view as well, otherwise we wouldn't see the investments into fossil industry. So you also mentioned that in the paper that there are certain barriers to implementing those changes. What would you see as those barriers?

Peter: Well, I think there are a couple of barriers. One barrier is from it's very difficult for a Risk Management System. What a bank is in the end, the bank has to manage risk. It's about lots of money, relatively small margins, so you have to be very keen on your risk management. And what you have seen since, particularly since the last financial crisis, that that needs improvement. And what you have seen that mainly old data of the old economy determine what your risk model is for assessing new risks, and that's actually holding you back from financing transition. You always come with more risk. Maybe you don't know the benefit so well, but you can identify the risk much more easy, and the risks are bit bigger because they do not refer to the old system. So whatever is new, that's a real issue for a banker. If you and you cannot explain that to your regulator, and the regular say, Well, if you take all this new stuff on you, you probably need more capital. More capital means lower profits. Lower profit means very hard to get new capital so it stops itself from a system point of view. The other thing is, the other solution could be that you have a different type of shareholdership. What is much more hybrid combination of government interest and some private interest where you maybe can lower the return for the investor by reducing some of the risks he has evolved in. And I think that's where the government can play an important role. And therefore you can create banks who do not go for double digit profit anymore, but for a reasonable profit of 5, 6, x7, percent, but with lower risks and with more involvement of governments to make that possible. So you have to create new institutions who are more regulated, also from a governance point of view, where you allow for entrepreneurship, but you make it possible for banks to work with lower risk profiles, and therefore also can reduce the profit demand from the market if you still want to finance things through the market. But that's the big thing. I mean, it's not something easy, but you cannot solve these things with easy measures, you have to look at the bigger picture. And what does it mean for not only regulation, what is still a sort of tweaking, but what does it mean for the more fundamental approach to who owns, actually a bank who owns asset managers, as they are so important for the development of society and transformation, and we don't want to have any control and say, Well, that's what the market will decide. The market will not. The market is not conscious about the future. The market is about conscious about the transaction next hour, even next second.

Till: Yeah. And that is part of the market system and market logic as well, right? Money flows into the highest profitability, and that's it's not even blaming individuals in there. They behave according to that system, but when you mention the new institutions and new regulations, they kind of need to make sure that money can flow into things that might be less profitable, but at the same time more beneficial for societies. And that is, of course, one of the big challenges.

Peter: Yeah and all this notion of profit, and I hear it also in the impact community. Actually, I think it's very hard to define if there is a real profit or not. There are always externalities. We are not conscious about and, we have to be very awake and looking from a holistic point of view to things before we decide this is profitable or not. The easy way of saying, but it has to be market conformity, in many things market conformity means that we exclude certain costs and leave them to others, and then it looks very profitable. I think that's not the way forward. It's far more complex. So we, we people say, well, it's easy when you talk about money, it's more difficult when you talk about climate impact, social impact. I think even from a money point of view, it's not so easy to define if something is profitable or not?

Till: Yeah, that's a very good point, and goes back to the roots of the Club of Rome, actually, that profitability maybe should be seen as more than the monetary value, but that there are all these externalities. And one part of the policy agenda is trying to internalize these externalities, but we need to be aware of the ecological ceiling of our economic system.

Peter: Exactly.

Till: And one part one project where we try to tackle this financing change aspect a little bit more also is the Project Earth for all, one of the last reports of the Club of Rome, where we argue for five different turnarounds connecting the social and environmental dimension. And one estimate we have there is that the transition will cost, or will be investments into the future in a range of 2 to 4% of GDP per year short term, because things that need to happen might be more expensive short term than just continuing with business as usual. So if we speak about these enormous amounts of kind of changing capital and work from one sector to the other, how do you see a split in that between public finance and private finance? Because we speak often about the public dimension of subsidies of investments of states, as we see it, also with the Inflation Reduction Act in the USA to starting this transition. But of course, private finance plays a big role. So how do you see that split?

Peter: I would say we should make it not absolute. So that's why I think, particularly where I come from, the Netherlands, they have this funny idea that things have to be made ready for the market. So there are huge investments through subsidies to make things ready for the market. And then you see the market waiting, waiting, waiting until it's ready for the market. And they pick it up then, and they take that gift by making it ready for the market, like for granted, and then start to make profit for the shareholders. Where I think we should be much more conscious about the public role of pre investing in new developments. That's why I'm so a big fan of national investment banks who can take a higher risk a long term view. KfW in Germany is a good example, but you have the same in the UK, you have the same in France. I think national investment banks are key in making this transition from a new idea scale it up to something where also other parties can step into. And what I think is important that this is not a subsidy driven organization, but it makes an investment with another risk profile. And sometimes they make good returns and they can use it for new investment, and sometimes they have big losses, because it has not been the development they envision. And I think it's very healthy for an economy, for our society, to have a sort of middle organization, like a national investment bank or institution to to bridge actually, to this more standard market approach. And I think they will also have an effect on the market, because if there are serious institutions, they will have an effect on those banks, asset managers that they step by step, will taking more risk on the real changes that are needed where now in this system they can't. It's like completely without any risk taking anymore. The margins are very thin. There's too much money anyway, so you cannot afford to lose anything, so nothing happens. This would be, for me, a very important step in many countries to much more consciously use public money in combination with private money to have these investment banks, national investment banks, working more from a commons perspective.

Till: And it's a good point, because this Commons perspective then also includes kind of the social dimension, right, where we often see that maybe the biggest challenge to solving climate change is not the technical dimension, but rather social acceptance and making sure that we don't also by subsidizing, by channeling finances in other ways that we don't kind of recreate a trickle up effect, where then not a few people in the fossil fuel industry benefit, but then a few people in the renewable energy, but that really all people benefit from that. Which also comes back to your point on ownership.

Peter: Particularly when financial exclusion, I must say, for the haves and the have nots is really happening, therefore you need a sort of countervailing power, and that is the commons, I would say, who help to for people to realize that we are all bankers, we own together, the banks, they just fulfill a function collectively for us. But there's not like a special knowledge or a special smartness they have to bring in and can make money out of that. That's maybe with technical products differently, but with banks, is just a a service to the whole system, and we should do that in a very good way, also entrepreneurial, but not in the way that you are positioning yourself opposite the customers. You are actually the customer and the shareholder should be the same, in my view, they should have because it basically is the same, because the shareholders only can get a return when the customer still believes the bank. And it has nothing to do with technology whatsoever. It's all about trust. And I know, because I've been there, I know how it works. It's all about trust, and the trust comes from the consumer, the consumer of banking products, and not from the shareholder.

Till: Which also shows, again, that economics and finance is not an objective natural science, but it's related a lot to psychology and values and belief systems. And now, I think more and more people, after the financial crisis have realized that, and there is a lot of movement with different ideas in the sector. So there are more and more organizations trying to see what different ways to finance are there. You mentioned the taxonomy. We have read a lot about green quantitative easing ideas in the last years, we hear a lot about modern monetary theory, basically arguing that a government that issues its own currency cannot run out of money. How does that give you optimism that there are so many new ideas coming up? Or what do you think about the current landscape there?

Peter: Yeah, in different ways, I think there are some very light tweaking things. What I think is okay, but will not change the system to the more fundamental modern monetary system theories. I think can really help to get us out of the idea that that there is an autonomous system of creating money, where you should look very carefully, what are the resources in the economy and support that with the money you can issue, so to speak, what is a different approach than we have we have now seen it as something you can steer with money because you have certain purposes. You can also see there are certain resources available. Let's make sure that they get financed. And I think that was, MMT I thought was, I think, in that sense, a very interesting approach. What I've heard, not enough yet, is, is this whole governance, ownership question around financial institutions, I think that is in the background, more fundamental than we realize, because is, in the end, it's still the shareholder interests, or maybe as a very important stakeholder on a group of stakeholders. I think there is still a sort of exclusive interest for certain people connected to it, and I think we should, in that sense, democratize the financial industry much more stronger than we did in the past. That doesn't necessarily mean that we make it all to state banks, because that will slow down things a lot. So there is a sort of in between area, the commons, where you can, well, you have to be much more creative to unlock the entrepreneurial qualities you need there as well. But not turn it, automatically in individual profit making, but make it much more profit making what is between good results, but also the community where you feed it back to. I think that's a very important principle. What I think we should pick up, there will be a lot of resistance, because that doesn't fit the ownership agency ideology in economics, but I think for finance, this is critical.

Till: And in that context, I might also recommend deep dive papers by Ken Webster, who speaks exactly about the third element between public and private. And get us out of the dichotomy of the last century, but get into the new one. So there is a lot of movement. There are still many blind spots. And last question, what do you think the role of the Club of Rome can be in this regard, in filling these blind spots? What should the Club of Rome do to not only finance change, but also change finance?

Peter: Well, I think in isolation, only to deal with change finance doesn't make a lot of sense. We simply have not the background as the Club of Rome to come up with lots of new ideas in finance. But put it in the bigger picture of system change, and do not speak about an isolated financial crisis. A financial crisis, first of all, is the result of crisis in other areas. And I think Club of Rome can really reveal that. Make that clear how they are in the poly crisis approach we are taking , how, particularly in the background to the financial system, is actually impacting that. In sometimes a positive way, but sometimes also in a negative way. So I'm very happy that the Club of Rome included finance now, because they realize that in the background, finance determines a lot of the interaction between the different crisis. And I think in this holistic approach in this system approach, I think there is where the Club of Rome can really add value. If you only leave it to monetary professors, I think it's not enough. You need ecologists. You need system thinkers. You need lawyers about governance experts. You need social experts, and they and that is what the Club of Rome is about. They bring together the knowledge and start to learn how things are interrelated. And we should really try to to work with that, with all these partners who have maybe more special interest and special issues like finance, like agriculture, like, economic thinking, like social questions, and bring them more together and say, Well, this is this how all those things are interrelated, and how we can make that work great.

Till: So even after 55 years of the Club of Rome, there's still work for us to do, and we will continue working on this. I would recommend everyone to check out the From financing change to changing finance paper. Thank you very much for joining Peter. Thanks everyone for listening to the Club of Rome podcast. And for more information, please visit Club of rome.org.