The conventional financial system is increasingly challenged in the perspective of the goals of Agenda 2030.
For Thomas Lagoarde-Segot, Professor of Economics and International Finance at KEDGE who also heads the Sustainable Finance Commission of SDSN France (Sustainable Development Solutions Network), Ecological Financial Theory can represent a real alternative.
During an interview with Xerfi Canal, he presents this new theory and reviews these strengths, particularly in the context of the Anthropocene era.
What is Ecological Financial Theory?
Ecological financial theory can be defined in two ways:
- A research program that aims to provide answers to decision-makers in the current context of crisis.
- A new paradigm, that is to say, a new direction and a new practice of research in economics.
The TFE makes two fundamental contributions: it introduces new concepts in the field of financial studies (economic analysis, social sciences, biology, and earth sciences) and it proposes a new methodological framework to give substance to these concepts and to open up new perspectives for the conduct of economic policy.
The Differences Between Ecological Financial Theory and Neoclassical Theory
Neoclassical financial theory, the standard theory, represents the financial system as a market for loanable funds (where savers lend to borrowers), without money creation, and in which banks are reduced to a role of financial intermediary.
In the absence of legal constraints, in particular, it assumes that the financial markets have the capacity to discover the true model of the economy and to reveal it to all the actors in the form of a price system, through of the mathematical “utility function” of a representative investor.
This is the market efficiency hypothesis, according to which the command and economy should be given to financial markets and their control indicators.
At the level of financial research, this hypothesis has given rise to criticism, especially since the last crisis, but it has been remarkably resilient as long as the seal between the disciplines was maintained.
The ecological financial theory is based on a very simple observation, as soon as bio-geo-physical data enters the analysis, in accordance with the UN Agenda 2030, the hypothesis of market efficiency shatters.
This can be explained in 2 ways:
- Markets are unable to discover and reveal the monetary value of the Earth system given the complexity of the mechanisms at work
- Earth science work shows that there is an indisputable causality between the development of the financial sector and the massive disruption of the Earth system observed in recent decades.
Thus, contrary to what neoclassical theory asserts, the creation of financial value is the mirror of the destabilization of the Earth system which threatens life as we know it.
To provide solutions, ecological financial theory postulates that it is necessary to go beyond the concept of market equilibrium to represent the economy as a monetary circuit connected to the Earth system.
This approach makes it possible in particular to import notions from Earth sciences into economic analysis likewise Economics Tuition in Singapore, and to bring out new approaches for research and economic policy in the 21st century.
For example, rather than talking about growth, we are talking about resilience, rather than talking about diversification, we are talking about diversity, rather than talking about financial transparency, we are talking about ecological transparency.
The Founding Article of Ecological Financial Theory
Solutions for stakeholders to take hold of ecological financial theory
To develop this theory, all the actors concerned will have to mobilize: researchers, decision-makers, and students.
As Thomas Lagoarde-Segot explains, researchers have taken up the subject through analyzes published in the Working Papers series of the Post-Crisis Finance Network.
We intervened in particular with France Strategies last year and we regularly interact with actors from the private, public and social, and solidarity economy sectors.
Thomas Lagoarde professor of economics and international finance at kedge business school
In terms of education, as part of the work of SDSN France and the International Academy of Sustainable Development Goals, the writing of an ecological finance manual by about fifteen researchers is underway.
This is an essential step because there can be no overhaul of the system without training the new generations, on the front line facing the consequences of the Anthropocene.