A guide for banks to steer toward a just and sustainable future
Editor’s note: To meet the needs of all people within the means of the living planet, the businesses that occupy our economy must be redesigned to pursue social and ecological goals. For central banks and financial regulators, this requires a new type of policy-making with broader objectives and greater imagination. Climate & Capital Media is now partnering with Green Central Banking to publish the key financial ideas needed to create a more sustainable and just global economy.
One progressive model that is gaining currency is called a “donut economics” — a name derived from the graphic that helps visualize it. The center hole represents the proportion of the population who lack access to life’s essentials, while the donut represents the planetary boundaries within which living systems operate and self-regulate. When these boundaries are breached, the system becomes unstable. The diagram was originally developed by University of Oxford economist Kate Raworth.
The following is excerpted from an essay by Erinch Sahan of the Doughnut Economics Action Lab and a senior associate at Cambridge Institute for Sustainability Leadership who lays out the argument for “donut economics.” It was first published by our new partner GCB:
There is growing recognition that the current global economic system is driving ecological crises and extremes of social deprivation and inequity. Donut economics provides one possible compass for turning this situation around.
The donut consists of two concentric rings: one represents a social foundation, to ensure no one is left falling short on life’s essentials; the other shows an ecological ceiling, to ensure that humanity does not overshoot the planetary boundaries protecting Earth’s life-supporting systems.
Donut economics calls on businesses to demonstrate how they will transform into more ecologically sound, just sustainable businesses.
Between these two boundaries lies a donut-shaped space that is both ecologically safe and socially just: a space in which humanity can thrive.
Getting into the donut calls for nothing less than a transformation in the dynamics of the global economy. Today’s degenerative industrial systems — inherited from the last century — are still using up and running down the living world.
At the same time, today’s concentration of ownership and power has limited the ability of developing an economy that shares value and opportunity far more equitably.
Business in a donut economy: step one
Donut economics calls on businesses to demonstrate how they will transform into more ecologically sound, just sustainable businesses. For many companies, it starts by reducing carbon emissions. It then requires new innovations in product design, such as eliminating single-use plastics and built-in obsolescence. But it also means committing to paying living wages for the supply-chain workers making the products.
The donut model depicting planetary and social boundaries. © Doughnut Economics Action Lab
Such actions are an important start, but they are far from sufficient if business is to become more planet friendly. This requires transforming not only the design of products, but the deep redesign of business itself.
A key to this is the design of a product. New and necessary design innovations are now being created and explored that make nature a priority. US outdoor clothing company Patagonia has gone so far as to make the Earth its only shareholder, UK-based shampoo company Faith In Nature has appointed a “nature’s guardian” to its board and Willicroft, a Dutch plant-based cheese company, has shaped the chief executive role to ensure nature is the priority.
Design innovations like these can fundamentally affect the likelihood of a business taking transformative, ecologically regenerative and socially distributive action. It offers the business case for regenerative agriculture, making significant investments in carbon-positive construction or sharing profits with workers and paying above a living wage.
Outdated central bank financial regulatory policy
However, the regulations and policy that govern modern economies present significant barriers. These limit the ability of regenerative and distributive companies to grow and thrive because they are hampered by a regulatory system that was not designed to work for them.
The climate crisis is giving central banks and financial regulators the opportunity to help reshape financial systems so they can foster businesses that are regenerative and distributive by design.
This includes transforming the financial sector. The world of investment has largely stuck to the outdated paradigm of 20th century economics — channeling finance to businesses that focus on maximum growth, margins and dividends. This approach fosters businesses with a design that often holds back the strategies and investments needed to create an economy which meets the needs of all people, but within the means of the living planet.
The climate crisis is giving central banks and financial regulators the opportunity to help reshape financial systems so they can foster businesses that are regenerative and distributive by design.
New policy levers
But a deep redesign of businesses requires new thinking in a range of areas — tax, public procurement, legal reforms, access to finance, start-up support, industry policy and broader business regulations. These are all policy levers needed to transform ownership, governance and to support businesses embodying regenerative and distributive designs.
The need for mandatory transition plans
Regulators could also require financial institutions to require their clients to show how they will mitigate risks arising from the net-zero transition. The EU is already considering legislating for these mandatory transition plans. Other policymakers could go further and require that transition plans apply to all businesses, and cover the broader design transformations needed to enable them.
Financial regulators could also make transition plans a requirement, which would ensure action is catalyzed across the economy and remove any perceived or actual disadvantage for first movers.
Understanding climate risk
Another approach is to focus policy on the disclosure and consideration of risks. For instance, central banks and financial regulators can build on the EU’s corporate sustainability due diligence directive, which “requires companies to conduct due diligence on the potential and actual impacts across emissions in scopes 1, 2 and 3. In addition, companies must adopt and implement climate transition plans.”
Planetary boundaries are being overshot along with shortfalls on the social foundations. © Doughnut Economics Action Lab
In relation to defining risk and materiality, they could also go far beyond the limiting scope of single materiality and embrace double materiality, to identify risks emerging from economic operations that impact the planet and society, whether or not it has a direct impact on the company’s bottom line.
Lastly, companies must dramatically expand the scope of corporate risk to also consider those who are most impacted by the growing social and ecological risks.
Inspiration can be drawn from the governance models of businesses like coffee brand Cafédirect, which gives farmers a seat on its board, or hydrogen car maker Riversimple, which has workers and communities represented on their board.
Broadening the range fo risk
Central banks and financial regulators are well suited to pioneer innovative models of governance across business, finance and policy-making because they have important agenda-setting impacts.
They can use this power to impress upon all economic actors the need for ambitious and urgent transformation in how business is done.
The immense influence of central banks
The power of central banks and financial regulators is in the pivotal role they play in setting norms and lending legitimacy to new ideas. Their policy making can embrace new and bolder innovations in the way we design finance and business to help create a business world that does much of the heavy lifting for a thriving economy and society that helps humanity into the donut.
Around the world, leading policymakers are already transforming cities and countries by unlocking the potential of businesses putting communities and the living world at the heart of their deep design. Central banks and financial regulators have abundant examples to build on to generate their own approaches to reshaping the world of business and finance.
