Last week a group calling themselves the Sustainable Finance Forum – itself a creation of the self-selected left-wing environmental/political lobby group The Aotearoa Circle – published an interim report. The report is 70 pages long, but don’t let that deter you as there really isn’t much there.
Of course, this is not just any lobby group. On the board of the Aotearoa Circle, for example, sits Vicky Robertson, chief executive of the Ministry for the Environment, and supposedly an apolitical public servant, advising ministers of whichever political stripe. Oh well, never mind those old conventions….. And one of the two co-chairs of the Sustainable Finance Forum is Matt Whineray, chief executive of the New Zealand Superannuation Fund, and supposedly an apolitical public servant charged with managing a large pool of taxpayers’ money from one government to the next. Somewhat surprisingly (but welcome) the Reserve Bank Governor isn’t a full participant in this body – although we’ve been left in no doubt of his ideological/political colours – but the Bank (together with the FMA and the Ministry for the Environment itself) is described as an observer.
Of course, the participants aren’t all (or even mostly) public servants. Woke left-wingery isn’t confined to the public sector and the second co-chair is a senior manager at Westpac, a bank which goes out of its way to advertise its enthusiasm for all such modern “worthy causes”. There is a “technical working group” of 33 people and probably 85 per cent of them are employed in the private sector (it does seem rather a large technical working group for a report with only about 50 pages of text).
What there isn’t is much substance or much rigour. There are dozens and dozens of grab-bag factoids – some real, some not – but little context. There is no sense, for example, that these people have any real understanding of how our current levels of prosperity were achieved. Perhaps more concerningly, given their breathless enthusiasm for stuff to be done, is that they demonstrate no awareness of the limitations of knowledge, the pervasiveness of uncertainty, or of the well-demonstrated capacity for governments to get things badly wrong. There isn’t much sign either that they have read any economics beyond Kate Raworth. And there is no sign either that they’ve engaged with Chesterton’s fence
In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, “I don’t see the use of this; let us clear it away.” To which the more intelligent type of reformer will do well to answer: “If you don’t see the use of it, I certainly won’t let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it.”
Perhaps the zealots are right and the end of the world is nigh, all that we have known must be up-ended etc, but it would be more reassuring if they showed signs of actually understanding why things are as they are.
The bottom line goal seems to “the transition to a sustainable economy” and yet this goal is simply not defined. Since these peope are from the financial sector, they talk a lot about a “sustainable financial sector”. In the media coverage of the report there was some coverage to the factoid that 95 per cent of respondents believed that the current financial system was not sustainable. I was one of the people interviewed as part of the project and I was one of the 5 per cent – partly perhaps because I was taken aback by the question: what on earth did “a sustainable financial system” actually mean? As the financial system didn’t seem likely to fall over (even the Reserve Bank used to tell us that before the Governor when chasing capital whims), it had been with us in much the same form for a long time, and had proved adaptable as market demands and regulatory structures changed, it seemed a pretty obvious answer to me. But clearly I wasn’t part of the inner sanctum, because in the report itself defines “a sustainable financial system” rather idiosyncratically as one that serves the ends favoured by the authors:
The aim of the project is to produce a Roadmap for Action on how to shift New Zealand to a sustainable financial system – from one which focuses primarily on (often shortterm) financial wealth creation, to one that supports long-term social, environmental, and economic wellbeing and prosperity for all New Zealanders, protecting natural resources for future generations.
Strangely, there is no mention of the fact that – relatively poor as New Zealand’s performance has been – material living standards here are hugely higher than they were 100, let alone 200, years ago, and for most people the day-to-day experience of pollution is also much less serious than it was 100 years ago. Technology, innovation, and finance have all contributed to those outcomes. There is lots and lots of talk in the report about Maori perspectives and ways of thinking – a better economic model we were told, one with no externalities apparently……. – but no apparent recognition – or concern – that Maori systems and worldviews (pre Western contact) had not exactly been tending towards the sort of high material living standards, and functioning financial system, that we take for granted today.
None of which is to be cavalier about where we stand now. There are outstanding issues around water, for example. But it isn’t obvious what role the financial system has to play there – regulatory issues around pricing, definition of property rights, access etc provide the backdrop against which borrowers/investors raise funds and other provide them. And, of course, there is a climate change, but if anything is characterised by uncertainty it has to be that area. One of the bugbears of the SFF (and the Reserve Bank Governor) is the (alleged) short-termism of the financial system, but they never seem to grapple – including in this report – with the fact that a relatively short-term approach is a prudent response to the risks created by uncertainty.
Pretty much every left-wing cause of the decade gets reference in the report. Inequality is a big one for them, but with no substantial analysis one is left with the impression that it is mostly for effect, and mood affiliation. Early in the report there was a referenced claim, for example, that “New Zealand’s income inequality gap has impacted GDP by more than 15%”, but when I looked up the reference it was to a North and South article which itself claimed – without a citation – that
OECD researchers have suggested our gap has hobbled GDP by more than 15 percentage points in recent decades, largely because of disadvantaged families bailing out of education.
Well, perhaps….but since OECD statistics also show that New Zealand employee skill levels are among the very highest in the OECD it seems unlikely. Oh, and returns to education in New Zealand appear to be quite low. And what it had to be with a “sustainable financial system” wasn’t clear at all. Being, apparently, a bunch of lefties they want a “comprehensive response to inequality” but what they mean, or what (if anything) it has to do with the financial system is left totally unspecified. It was the feelings that mattered apparently. They do claim the “current financial system” is contributing to “growing inequality”, but make no effort to justify either limb of that claim.
We got similarly feeble references to the so-called “gender pay gap”. There was a whole page on modern slavery and labour exploitation, some of which was interesting, some of which was fair, but none of which had any discernible relevance to the New Zealand financial system. Hard to disagree, I suppose, with the banner quote on that page that “a financial system cannot be sustainable if it undermines the basic human rights we all hold dear” but even if true – and I’m thinking of exceptions as I type – it isn’t overly helpful or offer any great insight on how the financial sector should adjust/evolve.
At the very front of the document the Aotearoa Circle told us about their vision which includes
They aim to achieve this by reversing the decline of our natural resources.
Which also seems pretty incoherent. I get the impression they have waterways in mind – which is fair enough I suppose, within limits (the benchmark can’t be say pre-1000AD conditions) – but natural resources include coal, gold, oil and gas, timber, ironsands and so on. Did they not notice? Are they proposing to put the coal back in the mountains – the same coal burned in the process of generating the living standards we have now, and the potential to move towards newer (cleaner) technologies? It is a small point in a way, but it is the sort of thing that is likely undermine any good a report of this sort might do among those who aren’t uncritical “true believers” to start with.
There is all the talk about rising sea levels and what this might mean. That partly involves using scary numbers about the value of affected buildings, but without any reference to the twin facts that (a) the dates they are quoting are mostly many decades away, and (b) existing structures depreciate. And then, of course, there is the talk about access to finance and insurance. Which are real issues no doubt, but they don’t unfold overnight – they are some of the better-foreshadowed risks companies have ever faced – and no reason (identified in the report) why existing market participants (and perhaps new entrants) can’t/won’t respond and adjust, in response to their own incentives, as they’ve always done. Same goes for wider climate change issues: the report claims ‘financial markets in New Zealand..are still largely misaligned with climate change and other sustainability imperatives”, but they offer no evidence for this – not a shred.
These people also have a bunch of other ideological causes. They appear to champion the Living Wage as a policy response to New Zealand’s poor productivity. Not only is that incoherent, but there is no obvious connection to the financial system (“sustainable” or otherwise) They rightly lament the high cost of housing – although never point out that were these government-driven distortions ever to be reversed and the market able to function well that housing finance would be a much much smaller part of bank balance sheets in future. Oh, and they are dead keen on Australia’s compulsory private superannuation system – but I guess we should mostly just put that down to (consciously or unconsciously) pure self-interest (it is a great system for financial industry service providers, while our own retirement income system generates very low rates of elderly poverty with a pretty modest fiscal burden).
And we get the best part of a full page on the Reserve Bank/FMA crusade around bank culture and conduct, all of which skated over the fact that when those agencies reported back (on their largely ultra vires activities) the bottom line was that there was little evidence of any sustained problems. But I guess that wasn’t the narrative these left-wing crusaders wanted to channel.
Buried amid the blather there are probably a few sensible paragraphs on a few specific regulatory issues, but what might be valuable is largely lost amid the rhetoric, and the rhetoric itself is of much-diminished value because there is so little hard-headed substance. We know for example that the Orr/Whineray NZSF could get away with making a big active punt on climate change, and so mask the punt that we can never properly hold them to account for it. But that is the weakly-accountable government for you. Most investors, most savers, want more than idle calls for the financial system to work for the “good of society”, however ill-defined that may be. All manner of chancers and opportunists (public and private sector) will tell you their project, their plan is “the one”. The challenge of anyone – especially anyone investing other people’s money – is to be able to recognise the good from the bad, manage the risks etc. And none of that is easy. None of us knows what the economy will look like 30 years hence, let alone this time next century. Not even Whineray and Silk.
There is an opportunity to submit on the interim report (link here). I’m not sure I’ll even bother. It is so bad (and so ideological) they’d really be better off ripping up the report and starting from scratch with a much more hard-headed approach to thinking through the issues and challenges, constraints and opportunities, including demonstrating a thorough understanding of the strengths and weaknesses of the current system But I guess that wouldn’t suit their mates in the Labour and Green parties, for whom reports like this help provide cover, even when largely devoid of substance, insight, or sustained robust argument.