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The problem of the financial sector is institutional amorality
In part two of a series unpicking pension funds, Brett Scott asks why, when investment is so political, the financial system operates in a moral vacuum
Students protest over government plans to sell off student loan debts
Financial professionals tend to deny the political nature of investment but financial decisions involve making moral and political choices, says Brett Scott. Photograph: Pete Riches/Demotix/Corbis
Picture yourself in the late 1700s. You're the manager of an 'ethical fund' specialising in investing in Caribbean plantations that don't use slave labour. You're debating with a group of financiers. They see your fund as a marginal offering for those who want to be nice, but not fit for rational, prudent investors.
In hindsight, we see such 'rational' investors of the late 1700s as dinosaurs, attempting to cling on to ideologies that society – and subsequently legal systems – would come to reject. Nowadays nobody gets a badge for not using slave labour. It's considered to be normal rather than explicitly ethical.
The battle to recast basic workers' rights as normal took a while though. Laws, ideologies and economic interests holding the old systems in place had to be systematically dismantled, and they didn't go easily.
Likewise, many current fund managers perceive investment in high carbon projects as entirely normal, rational or inevitable. If you want to be overtly 'ethical', you have the option of green funds. But it should be taken for granted that sustainability is a standard feature of investment, not a nice exception.
Many people are aware of the future injustices being created in the everyday practice of finance, and there are a variety of interesting attempts at positive innovation and reform. Those diffuse concerns though, are easily overpowered by the drive to maintain business-as-usual.
In this article, we'll hack deeper into those layers of social code holding back positive change.
The business of maintaining business as usual
Campaigners working for NGOs frequently imagine that the dominant form of power in the financial sector is explicit in-your-face power. They may imagine an arrogant investment manager refusing to care about sustainability.
This often casts the issue in terms of individual immorality though, with the financial sector imagined as a web of calculating individuals consciously seeking to maintain power. And perhaps the most obvious example of this is through the aggressive lobbying of the financial industry.
But the more prevalent forms of power are much more subtle. For something to be lobbied against it has to at least make it onto the political agenda. Obvious political targets like bonuses get much attention, but equally damaging issues, like narrow legal definitions of 'fiduciary duty', are often ignored in the context of unspoken class cohesion between financial professionals and politicians. They attend the same universities, dine at the same restaurants, and remain blind to similar issues.
Institutional amorality
Bonuses are an example of an obvious carrot encouraging financial professionals to think in a short-term fashion, but they exist within a web of structures that enable individuals to distance themselves from moral responsibility for the consequences of their investment decisions. The major problem of the financial sector is not individual immorality. It's institutional amorality, the sense that there is nothing abnormal occurring whilst delivering a slow-motion punch to the face of society.
The average junior investment analyst, for example, does not perceive themselves as doing something wrong as they build investment cases for how to lock in 25 years more of fossil fuel reliance. They are within a hierarchal management structure that splits decision-making from analysis and execution.
They use technology which help to abstract real life situations – like mountain-top coal removal – into spreadsheets. The dynamics of stockmarkets increasingly encourage investors to think of investments in terms of prices, not real world assets.
If politicised concepts like resource distribution are packaged into apparently apolitical language, there is no need to think too much about it.
Investment is political
Investment involves steering wealth and resources around the globe. It is inherently political. The tendency among financial professionals though, is to deny the political nature of investment and imagine it rather in technocratic terms.
Alongside the denial of the politics of investment, there is a tendency to imagine investment rationality as frozen in time rather than accepting that it has changed many times over history. Not using slave labour is currently characterised as normal rational investment, whereas not destroying ecosystems is considered 'ethical', 'emotional' or 'irrational'.
Perhaps most insidious though, is the pervasive denial of creative agency found in certain parts of the financial sector. The investment management industry refuses to accept that they actively define the future through their investment choices, disingenuously casting themselves as mere servants of others.
More broadly, this same denial of agency is found in the widespread faith that problems will be solved, not by the investment community working together, but by disembodied market forces. Market ideology can take the form of the aggressive 'greed is good' dogma associated with investment banking culture, but more prevalent is a faith-like belief that solutions to our crises will be mysteriously sucked out of society when demand for them is strong enough. This circular argument is the ultimate cop-out.
Stuck in the matrix
Many finance professionals do sense that something may be wrong in modern investment philosophy. The ideological supports for business as usual, are readily available for use in weaving a convenient story in the heads of investment professionals.
Such beliefs would be more convincing to outside observers if the professionals holding them were not benefiting from the process of maintaining the status quo. But it's not just that the individuals in the industry earn high salaries. They are locked into broader reward structures.
They have friends in the same position, reinforcing the basic mental patterns. It's hard to focus on the future of human society when you're surrounded by convenient justifications, everyday constraints and demands, and bankers calling you up to invite you out to the cocktail bar.
In the final article in this series, we'll explore how this cultural system might be disrupted, and how we may harness the expertise of the investment industry towards positive ends.
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