Changing the Game of Finance

Invited paper for “The World as We Want It to Be” SRI in the Rockies 20th Anniversary, October 25-28, 2009.

By Hazel Henderson © 2009

Marking the 20th Anniversary of SRI in the Rockies offers more than an opportunity to review the hard-won progress of investors to prove that socially responsible investing is viable and now clearly out-performs traditional mainstream investing. Since the credit crises of 2008-2009, we can now assert with confidence that investing for long-term sustainability and taking ESG factors as material to asset valuation could have actually helped avert these crises. We investors are now winning the paradigm battle and cite the evidence to show that the Efficient Market Hypothesis (EMH) is bunk and by the same token show that the Modern Portfolio Theory (MPT), the Capital Asset Pricing Model (CAPM) and, yes, even the sacred tenets of the “rational investor” and the Black-Scholes Merton Options Pricing Model will soon be part of history.

Thomas Kuhn, told us in 1963 in The Structure of Scientific Revolutions, we often must wait until a generation passes from the scene. Today, we humans are out of time. Climate chaos is upon us and our limiting factor is not money – it never was, since money is simply one form of information. Time is now our limiting factor, as we have until 2020 to keep CO2 and other greenhouse gases, methane, as well as soot, ozone and other pollutants from raising global temperature more than 2C. This means that the game of finance must change to address both its internally-generated global crises and the climate crises which finance has and continues to exacerbate with its blindness to ESG factors and its culture of greed, myopia and short-termism. We were encouraged by our colleague Mindy Lubber’s remarks at the introduction of the statement on September 17th of the Institutional Investors Group on Climate Change (IIGCC): “We are ready and willing to up the ante and finance the transition to a low-carbon economy.

Some 15 years ago, I, Steve Schueth and Wayne Silby began creating the Calvert-Henderson Quality of Life Indicators ( in the belief that incorporating ESG factors into asset valuation and corporate accounting at the micro-economic level would be necessary but not sufficient. We and Calvert CEO Barbara Krumsiek knew that traditional micro-level accounting when aggregated into national accounts such as GDP would inhibit the needed corrections at this macro-economic level. We knew that GDP would also have to include ESG factors; otherwise, its faulty, narrow, short-term view of national “progress” would drive us closer to environmental collapse, social inequality, disease and conflicts. Economist Joseph Stiglitz agrees and warned of the dangers of “GDP-fetishism” in his report to France’s President Nicholas Sarkozy.

Today, UN-PRI, CERES and other groups of institutional investors continue to lead in promoting ESG and longer-term asset valuation and the need to address climate change. Yet too often, these worthy organizations and their institutional investor members are still captive to the discredited paradigms of finance I have mentioned. Until trustees and shareowners change incentives for their asset managers and consultants, they will still obsess over benchmarking each others’ performance according to these now destructive criteria and models. Financial networks are complex, adaptive systems, but reliance on this approach serves little more than to comfortably abstract the debate. Some critiques, such as that of Andrew Haldane of the Bank of England, analogize financial networks to electrical grids. This overlooks the different purposes of these networks: an electrical grid is designed to deliver a useful service: electricity to human societies. Financial networks have expanded globally to increase and speed up the activity of trading which is linked to compensation of the actors and the financial returns of firms. That humans have a propensity to barter and trade is commonplace, but trading for trading’s sake has become pathological, an addiction similar to gambling, obsessions with pornography and sex.

Addiction to trading and internet-use are now studied by psychologists as is the elevated testosterone levels exhibited by traders in London’s financial markets. Thus, one cannot expect any human actors embedded in today’s financial networks to think more deeply about their purpose, social utility or the systemic risk that finance now clearly poses to all societies and to ecosystems. At what point did financial markets metastasize to become a cancer on their host: human societies? To ask individual traders or companies would be analogous to expecting the patients and psychiatrists in a mental hospital to design a more optimal system to address dysfunctional aspects. Even less charitable criticism comes from Prof. Simon Johnson at MIT, former chief economist of the IMF who comments on Wall Street’s capture of politicians of both parties in the US Congress as “mind control” (Baseline Scenario, October 8, 2009).

Britain’s head of the Financial Services Authority Lord Adair Turner questioned the social usefulness of finance and proposed to downsize financial sectors by imposing a financial transactions tax (originally proposed by James Tobin in 1978) and by Lawrence Summers in 1989. To re-think financial networks requires going outside the box of all current economic models and the financial “innovations” from which they are derived. Current models derived from faulty economics include: the aforementioned EMH, MPT, CAPM, and VaR. The Black-Scholes-Merton Options Pricing Model is now challenged as plagiarized from options traders’ practice by Nassim Taleb (Financial Times, October 12,2008). Human investors do not conform to economics’ “rational actor” model, but are revealed by neuroscience (not neuro-economics) as being of two minds: the forebrain (logic, foresight ad higher analytic functions) and the amygdala (the primitive, reptilian brain that responds to emotional stimuli). Thus, financial markets, far from being “efficient,” are typical examples of herd behavior (monkey see – monkey do!, see my editorials at and

The key issues in reforming financial networks are: human social purpose, design criteria and assumptions. Using analogies from architecture and engineering: a bridge, if well designed on physical principles, mapping the forces of nature correctly, will be robust; if badly-designed, as the famous Tacoma Narrows bridge, it will respond to natural forces of wind and oscillate with ever greater amplitude until it collapses. The same applies to buildings that are not designed to account for the laws of natural systems. My late friend Nicholas Georgescu-Roegen made similar observations about economists’ love of abstraction in his The Entropy Law and the Economic Process (1971) which I reviewed in the Harvard Business Review.

Therefore, financial networks must be examined from these perspectives and we see their design flaws immediately: they were designed by individual actors and firms to maximize their self-interest and produce rewards in money terms. They were never designed to optimize at the societal level, let alone to function within natural system constraints. Furthermore, they optimized for trading as the primary means to money rewards (hence the growth of proprietary trading desks, day traders, high frequency trading and algorithmic program trading which now dominates market activity). This is why a financial transactions tax is urgent and why I and my partner, mathematician Alan F. Kay, designed a computer program which can be installed on all trading systems to collect such a small tax, the Foreign Exchange Transaction Reporting System (FXTRS) for which we were granted a US patent (see FXTRS).

Beyond the pathologies of trading with ever-faster computers, we must next examine the other huge design flaw underlying financial networks: money-creation and credit-allocation. These activities are designed not to create stable, healthy, equitable sustainable human societies. Here, again, money-creation and credit-allocation follow power laws and are designed by sub-system level actors and institutions (banks, central banks, local and national government agencies). Their design criteria are fitted to highly abstract goals: containing or targeting inflation, increasing or decreasing the money supply, NAIRU formulas for unemployment levels, fostering private investment – all vague generalities and measured with dubious statistics: the Consumer Price Index (CPI), Gross Domestic Product (GDP), M1, M2, M3 (now deleted as too revealing of monetary expansion).

The good news is that today’s confluence of global crises in finance and climate are revealed as crises of human perception: a mirror our mother GAIA is holding up for us to see ourselves and our myopic value-systems. The Information Age, as I predicted at SRI in the Rockies in 2005 has morphed into the Age of Truth. Our native American nations and the world’s indigenous peoples have been articulating these truths for centuries now echoed by the President of the UN General Assembly in New York, June 2009.

The movement toward planetary awareness is now worldwide and goes by many names: One Planet, socially responsible investing, sustainability, the Global Green New Deal, the Green Economy Initiative, the Climate Prosperity Alliance, Transition Towns, Green Jobs, Green for All, “green stimulus,” the Global Marshall Plan, the Post-Carbon Society, the State of the World Forum, the Phoenix Economy, Breaking the Climate Deadlock, Climate Bonds, as well as the hundreds of thousands of groups in over a hundred countries calling for new forms of sustainable livelihoods in their own languages. NGOs are leading and governments are devising responses to protect the most vulnerable populations: women, children, the poor and the least-developed countries from the crises’ impacts. Connecting all these groups working on these same interlinked crises can achieve their shared vision of “The World as We Want It to Be.”

All our crises are closely related to the dying fossilized paradigm of “economism” and its deadly addiction to continuous economic growth measured in money, whatever the social and environmental costs. The disparate social movements of the past 30 years began coming together over the internet and at the World Social Forums, launched in Porto Alegre, Brazil in 1999. Today, in their statement on reforming finance, they are coalescing over these ever-accumulating threats to life on earth, now culminating in global climate disruption. The United Nations joined with civil society in calling the financial and climate crises an opportunity to transition to fairer, cleaner, more sustainable forms of human development.

Ever since the UN’s climate agreements in 1997 in Kyoto, Japan, the evidence from the scientific community of this mega-threat to our collective survival has grown stronger and more ominous. Still the biggest per capita polluter, the USA refused to sign the Kyoto protocols and, with some of its misguided environmental policy makers, forced their “market-based” cap and trade approaches on successive UN climate conferences. Their idea of capping carbon emissions was sensible enough, using government targets and regulating continuous reductions. But instead of backing enforcement of carbon caps and shifting tax burdens from incomes and payrolls to taxes on carbon and all other pollution and waste, the US “market fundamentalists” demanded that “allowances” to continue emitting carbon be given to polluters to trade with each other. The disgrace of Wall Street has now made trading carbon derivatives as suspect as the credit default swaps that caused such havoc in financial markets. Widespread public objections forced governments to agree to auction pollution allowances, but fossil fuel lobbies have kept their give-aways. INTERPOL, the UN crime-fighting agency, warned of carbon fraud and that carbon-trading could become the white collar crime of the future (

Bankers, stock market traders and commodity brokers saw carbon as a new trillion dollar “asset class” and profit opportunity. Yet the “cap and trade” emissions schemes in Europe created proliferating bureaucracies with caps on emissions easily lifted by lobbyists. Ironically, the very financial players who caused the global financial crisis see carbon trading as their next big profit source. As carbon markets failed to reduce carbon emissions, this has shown the efficiency of simply taxing carbon. The Copenhagen conference in December 2009 can include a global price for carbon.

This debate as well as on how to alleviate the impacts of the financial meltdown and meet the UN’s Millennium Development Goals and the Monterrey Consensus of 2002 were forced into the narrow calculus of costs in money terms. Economic methods usually favor quantifying costs to incumbent sectors and existing institutions, rather than estimating savings, benefits and revenues from new ways of doing business, new technologies and social policies. For example, the climate debate focuses on GDP growth “losses.” Critiques of GDP-measured growth, including my own over the past 30 years, are finally gaining traction, including the Calvert-Henderson Quality of Life Indicators, making headway with the accounting profession and at the European Parliament’s Beyond GDP Conference in 2007 which the European Commission will begin implementing in 2010. Yet the financial sector still dominates US politics: bailing out Wall Street firms was deemed necessary to “restore” the financial system. Investing in growing the green economy, our children’s health and education for a prosperous future are deemed “too expensive,” even as a BBC-Globescan poll in 20 countries found 72% of their public’s support governments investing in renewable energy and green technology.

At last, focusing on carbon emissions in the obsolete fossil-fueled sectors no longer trumps quantifying the uncounted savings, benefits and avoided costs of investing in a global transition to the green post-carbon economy based on energy efficiency, wind, solar, ocean and geothermal sources. Guy Dauncey, author of Stormy Weather adds up all the estimates of savings so far at $1.7 trillion annually in the USA alone. McKinsey & Company finds that a $520 billion investment in energy efficiency would yield $1.2trillion by 2020 and reduce US demand by 23%. Meanwhile, some still view financing for meeting the UN Millennium Development Goals as a cost when in reality, such finance belongs in the investment category. The “rearview mirror” economism calculations must no longer dominate the financial and climate debates – spreading increasing gloom and fear while governments pour trillions into trying to restore the broken status quo. Meanwhile, fossilized asset-allocation models still blind security analysts to the growing companies in the expanding sustainability sectors of the world economy.

Meanwhile, the greener, sustainable sectors are still growing worldwide, as renewable energy investments by 2008 exceeded investments in coal power plants. The grassroots movements for sustainability are growing as well. The Obama administration in the USA and the General Assembly of the United Nations grasped the potential of the shift to the green, sustainable sectors worldwide. The rigid G-7 and G-20 summits gave ground to the G-192 as all the member countries of the UN came together in New York in June 2009, adopted the Stiglitz Commission Report and declared their support for the new just, green, sustainable global economy led by UNEP, UNDP and the ILO. Eighteen other UN agencies also support what is now called the Global Green New Deal. The European Union’s president called on the USA to make bigger commitments to cut its carbon emissions and assert more leadership on climate. All now see the meltdown of the global financial casino and the climate crisis as a chance to create a new, more just, green economy promoted for decades by civil society.

Finally, the world can put economism in its place and downsize finance to its limited role facilitating real production. An efficient financial sector should constitute less than 10% of a country’s GDP. Britain’s Financial Services Authority head, Lord Adair Turner shocked many insiders, but his proposals for a financial transactions tax are now supported by many academics and NGOs. Financial firms not covered by FDIC should pay into a Systemic Financial Risk Insurance Fund (SFRIF) to protect the world’s taxpayers from future bailouts. As our Chinese friends say, “Markets and money are good servants but bad masters.” Thirty-four percent of China’s stimulus package and 81% of South Korea’s are focused on investing in solar, wind and green economic growth. UN Secretary Ban Ki-moon praised China’s President Hu Jintao for these green economy initiatives. China’s “green technology sector” is expected to grow to 15% of its GDP by 2013. As policies of John Maynard Keynes are back in vogue, many forget that his main insight was about the inherent uncertainties and instabilities of financial markets.

The spectacle of the US and other central banks printing money on TV helped raise public awareness that money is not real wealth but just a clever invention of humans to track our promises and intentions and keep score of our transactions and uses of natural resources. The many electronic trading exchanges are flourishing, such as Entrex, showcasing and steering capital to small companies; peer-to-peer lending sites, Prosper, Qifang and Zopa; barter sites Craigslist, and Freecycle that facilitate sharing, recycling; microloan sites, Microplace and Kiva, and Global Giving, Global Greengrants for charitable donating, as well as local currencies and LETS systems. Today information-based trading has illustrated that money circuits and markets have been overloaded by political directives, “quantitative easing,” subsidies, carbon trading, etc., instead of direct, transparent legislative approaches. Furthermore, it is now clear that we don’t need Wall Street, the City or any other “financial centers” that have now imploded anyway. The Great Disintermediation away from money circuits is underway. The 20th century “too big to fail” monsters came to believe that they were “providers of capital” rather than mere intermediaries connecting savers with borrowers and manipulating money issued by banks out of thin air.

This money-creation and credit-allocation system is so far removed from the real world of human production and exchange, as well as ecosystem functioning, as to be delusional. Following the founding of the Federal Reserve System in the USA in 1913, the money-creation function given to the US Congress in the Constitution was turned over to the twelve private banks of the Federal Reserve System. Only the Federal Reserve Board is appointed by the US President and Congress. Since then, private banks using the fractional reserve system create 95% of our currency as accounting entries of the loans they make, i.e., as debt. The interest charged on their loans is not created, causing increased indebtedness. This system, which unfortunately spread around the world, was aided and abetted by the Nobel Committee’s acceptance of the Bank of Sweden’s prize to legitimize the profession of economics in memory of Alfred Nobel. Since this Bank of Sweden Prize was given to Prescott and Kydland in 2004, who used specious mathematics to “prove” that central banks should be independent, many real Nobel Prize winners as well as mathematicians Nassim Taleb, Paolo Triana, Ralph Abraham, physicists Hans Peter Durr and Fritjof Capra, and historian of science Robert Nadeau, joined me and Peter Nobel in calling for its de-linking from the real Nobels.

These deeper issues of design, human purpose and hidden assumptions must be examined for their roots in power dynamics and how such initial conditions in complex systems lead to deviation amplifications, e.g., money systems came to dominate political systems and disorder local social systems and ecosystems. Elegant abstractions and use of analogies obfuscates these basic power dynamics which allowed financial networks to explode worldwide during the 1980s, fostered by the prevailing market ideologies promoted by the University of Chicago School and Ronald Reagan in the USA and by Margaret Thatcher in Britain.

Many reforms of finance are being debated in the G-20 and the US Congress. These include a clearing house and exchange for credit default swaps (CDSs) and other derivatives; more information on financial network pathways and agents; correcting the errors of Basel II and re-regulation, including an updated version of Glass-Steagall (see my 2009 articles at Other systemic reforms are also widely debated: reforming financial compensation and incentives; credit rating agencies; re-introducing financial transactions taxes; creating a new Systemic Financial Crisis Insurance Fund (SFCIF) to assess premiums from all financial firms not covered by the FDIC in the USA; setting up systemic risk oversight bodies; creating a new global reserve currency (based on a basket of robust national currencies: the dollar, euro, yen, yuan, sterling, real) and issuing of more SDRs by the IMF. Reforms already in the public debate include auditing and reforming the US Federal Reserve System (in a bill offered by Republican Congressman Ron Paul with over 250 co-sponsors) and the Monetary and Financial Reform Act of 2009 offered by Democrat Congressman Dennis Kucinich and the American Monetary Institute (

This new understanding that money is simply one form of information is helping people realize that, of course, there is enough money to invest in our common future. Hundreds of towns around the world have issued local currencies to link unemployed workers with needed jobs. Lawyer Ellen Hodgson Brown, author of The Web of Debt (2008), explored the Bank of North Dakota, a state-owned bank that has kept North Dakota’s budget in surplus. The real constraint has never been money, but rather limited vision and faulty economics. Human societies’ ten-year window to install a post-carbon, global economy led to the global network, the Climate Prosperity Alliance, which I am honored to serve as a vice-chair. The Climate Prosperity approach is rooted in ESG accounting and the new Green GDP approaches in Europe, China and here in the USA. The Climate Prosperity Alliance is promoting a rapid ramp-up of private investments in solar, wind, renewables and energy-efficient infrastructure in developing countries.

Joining the Climate Prosperity movement are many socially responsible investors, charitable endowments, “green” bankers, many unions and NGOs, including WWF, which help fund many climate investment studies. Tomorrow’s Company, CERES and the UN Principles of Responsible Investing all have issued reports on investing in green companies. All of this and daily news is reported at from sources, including New Energy News, Responsible Investor, New Energy World Network, Cleantech, CleanEdge, GreenBiz, Greener Computing, Energy & Capital, Environmental Finance, Green Chip Review, Alt Assets, the American Council for an Energy Efficient Economy (ACEEE), Green Budget News, Germany, China’s Syntao, Brazil’s Mercado Etico and Instituto Ethos and others from India, Japan and Australia.

The last piece of the puzzle to achieve Climate Prosperity within the ten-year window limiting temperature rise to below 2 centigrade are the climate prosperity bonds (see Climate Prosperity Funds). Socially responsible retail investors are now joining forces with the Network for Sustainable Financial Markets, the Green Economy Initiative of UNDP, UNEP and the ILO and the eighteen other UN departments and many government agencies. We welcome greater leadership from institutional investors as they shrug off the old EMH and Modern Portfolio Theory nonsense.

The new global effort to fund Climate Prosperity, would invest $10 trillion over the next ten years and plans to double installed renewable energy and efficiency savings each year. This $10 trillion is less that the $14 trillion spent in the US on Wall Street and other bailouts so far (actual liability is now estimated at $23.7 trillion by the TARP Special Inspector at The proposed $10 trillion investment in Climate Prosperity is less than 10% of the $120 trillion of assets in pension funds for beneficiaries’ future security. Today, climate change is a threat to them and all humanity’s future security. The British government now estimates the “green” market at £3 trillion worldwide. What better plan is there than to invest these pensions’ assets now in securing their future in a safe, sustainable green economy? Climate Prosperity bonds with governments’ guarantees and laddered maturities are geared to the payouts from energy efficiency (the quickest payback) and to expanded efficiencies-of-scale in wind, geothermal and solar. Most developing countries can never afford nuclear energy and are unlikely to be able to afford much coal or oil-fired electricity. Solar, wind, geothermal and small-scale hydro and biomass are their most realistic options, together with new natural gas finds, making it cost-effective for coal plants to switch to natural gas for base load and peaking power – reducing carbon emissions by 50%.

Such bonds will be attractive to pension fund asset managers as outlined by Climate Risk, Pty of Sydney, Australia, and the Network for Sustainable Financial Markets. The Breaking the Climate Deadlock Plan of The Climate Group calls for $1 trillion to achieve a 70% reduction in emissions by 2020 – largely through energy efficiency. The DESERTEC group of 12 European companies led by Munich Re and ABB plans to invest €450 billion in solar-thermal power plants across North Africa to provide 15% of Europe’s electricity via DC transmission lines under the Mediterranean. Surprising support for larger foreign direct investments (FDI) into emerging and developing countries comes from The Economist in their special report on the world economy, October 3, 2009, p. 25-6. Such a larger role for FDI is seen as an optimal way of re-balancing the imbalances that helped cause the economic crises.

During this ten-year rollout of the new low-carbon economy globally, coal and oil, as well as nuclear, will become even more costly and less competitive (even without accounting for their external costs or the price of carbon). The faulty logic of economism which sees the problem as a “shortage of money” is exposed by the Climate Prosperity movement which sees the payback on that $10 trillion after 10 years as approximately $30 trillion. This illustrates that the real constraint is time, not money. After wasting decades, we humans must act now. Economists need to correct all the colossal taxonomic errors in all economic texts and models. Finance courses in all business schools also must overhaul their curricula, as many critics including Nassim Taleb, Paulo Triana and I have proposed. Today’s financial networks are indeed houses of cards and multi-disciplinary approaches to valuation of all forms of wealth are now supplanting economics and its metrics, including The Economics of Ecosystem and Biodiversity Services (TEEB) and the Green Economy Report forthcoming from the United Nations Environment Program (

The Climate Prosperity movement, together with many groups leading in widening awareness, planetary citizenship and perennial wisdom from indigenous peoples and all faith traditions is succeeding in changing the paradigm From the dismal economism, money-based scarcity and fear to a vision of abundance through sharing, caring, volunteerism and community revitalization, all built on using the energy freely available from sun, wind, oceans and respect for the Earth and all life. The 16 Principles of the Earth Charter are now endorsed by thousands of cities, companies and NGOs ( Copenhagen can host the positive tipping point: the “greening” of finance and a worldwide critical mass of global citizens and their rising eco-aware culture in the emerging information-rich Solar Age.

Hazel Henderson, president of Ethical Markets Media (USA and Brazil), authored The Politics of the Solar Age (1981), Ethical Markets: Growing the Green Economy (2006) and the Calvert-Henderson Quality of Life Indicators, updated regularly at She is also a private investor in “green” companies and can be reached at and