The global coronavirus pandemic has served as a stark reminder of the interconnected and interrelated nature of the world during the past two years, highlighting the shared nature of myriad social, economic, and environmental challenges facing humankind in the early 21st century. The United Nations Sustainable Development Goals (SDGs) represent the world’s best consensus on the urgent actions that need to be taken by 2030 to ensure sustainable and inclusive future for all. But with less than a decade to go, the world is running out of time to meet the goals. Further the cost of doing so has been exacerbated by the both the pandemic and years of slow progress on key goals globally, with the financing gap of meeting the goals recently estimated by the OECD at US$42 trillion for the next decade, or approximately 5% of global GDP annually, likely underestimated given the cost of raising living standards, financial inclusion, and energy transition. Further, the world’s challenges will not end in 2030 even if the goals are met, and trillions more will be needed to fund the longer transition underway to a sustainable information.
Such amounts are clearly beyond the capacity of the world’s governments to fund and will likely require the participation of private sector capital at scale. The global finance industry, which allocates assets equal to 83% of the world’s net liquid wealth, clearly has a critical role to play in this regard but the degree of freedom it currently feels it has to play with in terms of deploying this capital varies given the mandates given to it by the ultimate asset owners. A recent extensive study finds that the actual freedoms are far greater than the perception1. However, any funding on the scale that is required calls for the alignments of a much more comprehensive set of stakeholders in the global financial system that just financial institutions.
This month’s Sign of the Times takes a closer look at the global stock and flow of the world’s wealth and money, seeking to identify the key stakeholders who need to align to fund the biggest challenges in the world and set a path to a more inclusive, sustainable future.
Global Challenges Require Systemic Funding Solutions to Solve
The world has made progress on multiple fronts with decade-by-decade gains in hunger, healthcare life expectancy and education. However, certain challenges have been persistent and include systemic inequalities, persistent poverty, increasing natural disasters from climate change, periodic violent conflict, mass migration and political upheaval create a vicious circle that undermine the world’s peace, stability, and development. 30% of the world’s population lacks year-round access to adequate nutrition, over 50% of the population lacks access to essential health services, and 1.5 billion people currently live in fragile, and conflict affects states2. Human actions have already significantly altered three-quarters of land and two-thirds of marine environments, and around 1 million animal and plant species are threatened with extinction. The 17 SDGs developed by the UN in 2015 and adopted by all 193 members states were designed to be a comprehensive blueprint of promoting a series of five interrelated themes of ‘ People, Planet, Prosperity, Peace, and Partnerships3.
Achieving the SDGs by their target date of 2030 is a critical prerequisite for the world to manage the interrelated crises it faces. And while progress on the SDGs has been steady and sigificant in some cases, it has also been insufficient, a state of affairs further exacerbated by the coronavrus pandemic, which has cost millions of lives to date, impacted the lives of billions, and necessitated the spending of trillions, while undoing years of progress on the SDGs. With less than a decade to go, the gap in funding required to meet the SDGs continues to widen, most recently estimated at US$4.2 trillion per annum, or c.5% of annual global GDP. With global spending against the SDGs estimated at c.US$3.2-US$4.2 trillion, global spending on the SDGs will need to more than double from their current levels for the goals to be fully funded, based on the currently estimated gap. However, recent estimates fail to fully capture key components of the SDGs like the cost of creating financial inclusion or the most recent cos estimate for meeting the Paris Agreement targets on climate change. The actual funding gap, and the required increase in spending is therefore likely to be much greater.
Of course, the need for sustainability, inclusion and development does not end at the arbitrarily chosen deadline of 2030 set for the SDGs, and further investments across all sustainable goals will be needed for the world to transition to a sustainable information age. The incremental costs of just the energy transition between 2030 and 2050 is estimated at US$80 trillion, for example, indicating that the urgent need to deploy capital at scale is a multi-decade challenge, and therefore one that will require a fundamental and systemic solution to solve.
All the Money in the World – Global Wealth and Capital Flows
The assumption that the finance industry, particularly the private sector - banks, asset managers, insurers, and others - controls the global flow of capital and can therefore fund global development is a flawed but common one. This assumption, coupled with the belief that funding shortfalls result from the institutions choosing not to deploy capital, is predicated on a series of misconceptions about the global stock and distribution of wealth, global capital flows and how the financial system itself works.
Any blueprint that seeks to mobilise global capital at scale needs to be predicated on the clear understanding of where the world’s largest pools of capital are, who they are owned by and who decides on their deployment. Mapping the global stock of wealth in the world and the flow of capital highlights a series of important considerations in this regard.
Key takeaways regarding global wealth distribution include the following:
- There is US$571 trillion of net wealth in the world. 58% of this (US$329 trillion) is in the form of liquid financial assets, while 42% is in the form of non-financial (illiquid) assets (US$242 trillion).
- Individuals (i.e., households) own 75% of the world’s net wealth. The vast majority of global wealth is held by individuals, who collectively own 70% of the world’s liquid financial wealth (or US$235 trillion) and 79% of the world’s non-financial (illiquid) wealth (or US$192 trillion).
- Governments collectively own approximately 25% of the world’s net wealth. Global governments collectively own over US$140 trillion in net liquid assets, held across a wide range of institutions including central banks, public sector assets, development institutions and others. (Endowments and foundations together own less than 1% of et global wealth)
- Including debt increases the stock of capital in the world by 25% to US$717 trillion. This ‘gross’ figure consists of US$401 trillion of financial assets and US$316 trillion of non-financial (illiquid) assets, with governments holding a much larger share of overall debt, leading to individuals’ share of gross global wealth declining to 66%.
- 68% of global gross financial assets is ‘managed’ by asset gatherer-allocators. US$274 trillion (or 68% of the total) in gross liquid financial assets are effectively allocated by individuals and governments to asset gatherers and allocators; including banks, insurers, and pension funds, with a significant portion of the balance placed in the hand of asset managers and other direct investors. (These direct investors manage US$87 trillion of capital but also receive allocations from asset gatherer-allocators, making direct contributions from ultimate asset owners difficult to quantify).
- Banks manage 60% of capital held by asset-gatherer-allocators. US$165 trillion or 60% of global gross liquid assets are managed by banks; other major managers of this capital are pension funds (19%) and insurance companies (14%), each of which exercises vary degrees of discretion over the assets they allocate.
- Non-financial corporations hold US$156 trillion in gross financial assets. While the value of their assets is ultimately reflected (somewhat imperfectly) as financial wealth held by their shareholders, non-financial corporations hold a significant stock of liquid assets, and their decisions on the allocation of these assets has meaningful impact potential.
- Nearly 70% of gross non-financial wealth is owned, and managed, by individuals. Individuals own and manage 69%, or US$217 trillion, of total non-financial wealth, most of which is held in the form of real estate. And while such assets are clearly illiquid over the short-term, long-term allocation decisions by individuals can have a significant impact on funding change, (a logic that also applies to the nearly US$100 trillion in public sector and other non-financial assets held by governments.)Key takeaways regarding the global flow of capital includes the following:
- Nearly 75% of total GDP is made up of consumption. Consumption accounts for c.73% or US$62 trillion of total GDP, while the remainder 27% goes into capital formation
- Nearly 75% of total GDP is made up of consumption. Consumption accounts for c.73% or US$62 trillion of total GDP, while the remainder 27% goes into capital formation
- Individuals account for c.80% of total consumption. c.78% of total consumption of capital is by individuals, with the remainder accounted for by governments (a portion of which is transferred back to individuals through stimulus, social transfers, and other fiscal measures).
- Global trade augments final consumption. Trade acts as a potential force multiplier to the impact of consumption, with US $22 trillion of annual trade in a global supply chain that adapts as a required to meet the demands of final consumption.
This snapshot of global wealth and capital flows therefore leads to number of conclusions that are critical for the funding of the world’s challenges and opportunities, pointing to the key stakeholders that need to be aligned to enable systemic funding solutions:
- The four most powerful players are the individual (with 66% of gross assets) and governments (with 34%), allocating capital to financial institutions as asset gatherers and allocators (who then manage 68% of gross financial wealth), and corporations who own financial assets equivalent to 39% of gross financial wealth.
- In terms of the largest stocks of capital in absolute terms, the individual and the finance industry are the most powerful players.
- The finance industry manages in excess of US$274 trillion and therefore plays a pivotal role in global capital allocation, however it does so based on the mandates provided to it by the ultimate asset owners which limit its ability to determine funding flows at its sole discretion. The level of freedom is higher than generally perceived based on a detailed examination and this may help change the flow of capital too.5
- While banks (60%), asset managers (19%) and pension funds (14%) hold the largest stocks of capital, these institutions are managers restricted by regulation and contractual agreements which mean that they cannot act without the mandate and discretion provided by the customer in how their capital is allocated.
- The power of the customer points to the individual (owning US$472 trillion, or 66%, of gross global wealth assets) are the ultimate arbiter of global investment flows, determining to whom this capital will be allocated, and to what extent it can be used to meet key sustainability goals.
- Individuals are also key determinants through their consumption (with US$49 trillion, or 78%, of total annual consumption) and their purchasing decisions have a material cumulative impact on outcomes through the goods and services they favour.
- Governments, traditionally responsible for funding society and social goods, hold a much smaller share of global wealth than individuals, and with much less discretion over its allocation given the relatively “fixed” nature of annual public expenditure. However, they play a key role in the financial system through their governance and fiscal and monetary policy actions
- Non-financial corporations, with direct control over US$156 trillion of assets, can generate material impact through their capital allocation strategies, recognizing that their level of discretion in re-deploying these assets is often highly constrained. While the sum of their assets is roughly equal to the total capital controlled by banks, corporations’ assets are closely tied to business needs, with only a small fraction being in the form of financial investments, limiting corporations’ flexibility in overall asset allocation.
An important note on this analysis is linked to the limitations of reconcilable, consistent, and complete data. However, the broad thrust seems to hold up despite these caveats.
Capitalism: A Multi-Stakeholder System
The patterns and distribution of global capital and its flows are of course not the result of random processes, they are the inevitable result of underlying ‘rules’ that have evolved that for how capitalism works, of which the modern financial system is the latest manifestation. Over the past 500 years, capitalism has stood unrivalled as an economic system in the creation of global wealth, whose on-going functioning led to the development of a financial system designed to manage and multiply it further.
The Global Financial Crisis of 2008-2009 exposed a series of systemic insufficiently managed risks inherent in this system. While much of the focus in the immediate aftermath was on the finance industry’s management of market and credit risk and the implications of the investment decisions on the stability of the market as a whole, attention has since shifted to a broader set of environmental and social externalities. ‘ Big Finance’ often now not only finds itself accused of failing to properly price such negative externalities but is also held accountable for the very creation of these externalities (alongside the companies directly responsible that they fund).
Holding the finance industry accountable for the shortcomings of capitalism and the financial system however is based on a mistaken understanding of how the system actually works, although the industry’s lobbying efforts make the case against them stronger. Capitalism’s shortcomings, just like its advantages are both an integral part of a system that is multi-stakeholder in nature. Taking one starting point, global society increasingly measures progress through increasing consumption and the accumulation of goods, be they public or material in nature. This linkage between consumption and progress is continuously reinforced by mass media as well as by the imperfect measurement indicators that are used as a proxy for progress (such as GDP, which measures the value of goods and services produced). As a result, the global economy is driven by mass-consumerism (with consumption representing 73% of global output), and with global supply chains extracting resources from around the world for goods and services to meet consumers’ needs.
Governments are measured by how well they meet the requirements of their citizens and either facilitate this consumerism through legislation, regulation and policy or risk facing the wrath of the electorate. Corporations compete to sell more than their competitors and the finance industry funds the parties involved in the cycle. This dynamic has given rise to system designed to match participants’ supply and demand in the most efficient manner, without regard for the world’s needs or requirements. Such a system leads to resource extraction without sustainability considerations, aided by research and scientific breakthroughs incentivised to drive efficiency and effectiveness, rather than long-term sustainability. All the parties above contribute to and participate in this system of consumption and the outcomes the system produces are a function of their objectives and priorities. While the system will automatically adapt to reflect the changing priorities of its stakeholders, the interrelated nature of the system means that any fundamental changes require the re-alignment of all participants, implying a true multi-stakeholder effort.
Conclusion: Unlocking the Power of the Individual
The starting point of such an effort can be many, for example a breakthrough in a sustainable energy causing industry to change this critical resource and funding to shift accordingly away from oil and gas, or political leaders agreeing to change the laws, regulations and rules that govern industries and consumers forcing a change in the system of demand and supply
Systems do not change easily. However, politics has seen a dramatic and disruptive shift through social media leading individuals to pivotal positions of power in referendum like Brexit and votes like the US 2016 election. This phenomenon is likely to cause as much upheaval in business and finance. So, the sustainability revolution may well be with individuals, who, as outlined above, own majority of the world’s financial assets. While the majority of individuals’ financial assets are invested by financial institutions, they hold the ultimate power over who invests their money and determine what they invest it in, providing the finance industry with the mandate to deploy capital using a broader framework than that of today’s risk and return criteria by weighting non-financial value (human rights, child labour, pollution, climate change, poverty, hunger, diversity, clean oceans on the negative and on the positive) alongside potential monetary gains. Further, individuals, through their control of 80% of the world’s consumption, can collectively fund and defund products, services, activities, and entire industries by placing value on such human and planetary considerations, with profound consequences for capitalism with knock-on effects across the whole stakeholder chain.
However, these shifts require either a growing awareness to crystallise into action or the managed alignment of action of individuals acting en-masse, or a combination of both. Some argue that this places too great a burden on the individual, which is perhaps a paternalistic position at best. However, the finance industry’s power and influence given the absolute amount of capital it manages, coupled with its relatively high levels of concentration, (e.g., with an estimated 25,000 licensed banks in the world, each one controls nearly US$7 billion in assets on average) is very real. Individuals on the other hand are much more dispersed, even considering the fact that the richest 11% of the world own 85% of the wealth (c.850 million people with an average wealth of cUS$250,000 each) or that the richest 1% of the world owns 46% of the wealth (77 million people with an average of S$1.5 million).[ Source: Credit Suisse Global Wealth Report 2021] Unlocking the power of the individual therefore requires enabling their collective action. Social media, which today connects over half the world’s population, has demonstrated the collective power of the individual in both politics and society. Technology has the potential to unlock the power of the individual in similar fashion across finance and economics, engaging, informing, and empowering billions of people as decision makers in consumption and investment, and providing them the opportunity to facilitate mass funding for change.
Funding the world’s challenges and the future will require all of the resources of the global financial system to turn to being a positive force, and this is a multi-stakeholder project of enormous proportions. The global finance industry as the allocator of the majority of the world’s wealth has a critical role to play in the development and the execution of changes to the system of course, The technology industry with its digital media platforms now accessing half the world, and growing day by day, is a hidden power in the capitalist system too. Looking ahead, the billions of individuals whose collective decisions about what they buy in the supermarket and online and therefore consume the world’s resources, by determining its production, and the value of those who supply these, are set to have the most effect on the global flows of capital. If this is not to be disruptive, it will need all stakeholders to work together. Succeed or fail, a new financial system is likely to emerge, the variable is only how smooth the transition is.
- A Legal Framework for Impact, Freshfields Bruckhaus Deringer
- Source: World Bank
- Source: United Nations Foundation
- Notes: 1) Net wealth of each Asset Owner arrived at by adjusting the gross wealth by the debt held by each Asset Owner;2) Asset Classes’ value is estimated at US$717tn (gross assets of Asset Owners) + US$116tn for double counting (cross holdings between companies and cross ownership of assets classes e.g., companies owning cash and deposits); 3) US$165tn of assets managed by banks includes current liabilities which are estimated to be [ ]% of the overall assets; 4) Insurance companies while being very similar to other asset managers like pension funds, do not manage the assets on behalf of the Asset Owners. Instead, they manage the risk that they have underwritten and only owe the potential insurance claim. So, they have been shown separately as an asset allocator; 5) Corporates do not manage money allocated by Asset Owners and are not Asset Owners themselves. However, corporates are like individuals, in that they have large sums of capital available for investment and have significant control over investment decisions. Hence, Corporates are shown in category B but their numbers will not be added to the total of Asset gathers – allocators; 6) Most commodities (except Gold) are owned by corporations and government and hence reflected in the equity and debt value of companies and assets of government; 7) Only corporates with above US$500m considered; 8) Arrived at by taking revenues of top 2,500 global private companies (by revenue) multiplied by 3.0x (Market cap/revenue of top 2,500 publicly listed companies); 9) Individual consumptions is the consumption by households and non-profit institutions serving households (NPISH); 10) Total government fiscal stimulus in the period from Jan-20 to Mar-21 totalled to US$10.9tn. Additional monetary stimulus of US$2.1tn was provided in the form of loans, equity injections, asset purchases etc.(this excludes US$4.0tn of guaranteed provided)
- A Legal Framework for Impact, Freshfields Bruckhaus Deringer
- Source: 2020 Capital as a Force for Good Report, Force for Good Initiative
- Source: Credit Suisse Global Wealth Report 2021
Creating Prosperity for a Billion People: Re-architecting the System of Wealth Creation