The buzz-word today in global finance is ‘sustainable finance’. An article published in the well-reputed periodical The Economist, explains the term ‘sustainable finance’ as an investment that focuses not just on financial returns but also on, environmental, social and governance (ESG) objectives to be achieved through that investment. Some other, similar terms for sustainable finance are green finance and socially responsible investment, ethical finance etc. The United Nations Environment-World Bank Group in November 2017, produced a document entitled ‘Roadmap for a Sustainable Financial System’ which views the development of a sustainable financial system as an essential step to ensure sustainable growth, without which the achievement of United Nations Sustainable Development Goals (SDGs) by the year 2030 will not be possible. Ironically, while the concept of sustainable finance includes everything desirable, it conveniently ignores the nature or mode of financing itself that directly affects the sustainability of economic growth. A sustainable financial system can never be created unless the mechanisms of finance itself are sustainable. As is commonly known, there are basically only two mechanisms or modes of financing: Debt and Equity. Traditionally, the focus has mostly been on raising money through debt; this has become an unstated norm in the world of economics and finance. The lenders may be foreign countries, foreign financial institutions, local banks or other lending institutions. The borrowers may be governments, public or private business entities, or even individual consumers. The riskier a loan becomes for the lenders, the higher the interest rates charged on that loan, without concern for the financially restricted borrower, who may or may not be able to the principle amount alongside the interest rate. The prevalent debt-based global financial system has created havoc within many economies of the world for some decades. It has undoubtedly hit the poor and developing nations the most. Let’s take the case of Pakistan, first. The biggest predicament facing Pakistan today is its economy, which has essentially been run on borrowed money for decades. Today, it is being discussed at the highest levels of government whether Pakistan should borrow from the IMF, or China, or raise money through launching Sukuk or green bonds in the market. These choices amount to raising future debt to pay off past debt, thereby getting trapped in an never ending cycle of debt repayments along with interest, which is a form of economic bondage. Pakistanis are quite familiar with the strict economic conditions that powerful international lenders have periodically imposed on their country, that have invariably been detrimental to the welfare of its common citizens. And it is not just Pakistan. The resource rich South American countries of Argentina, Venezuela and Eurasian countries like Turkey are too devastated by their respective debt crisis. The sustainable finance concept conveniently ignores the nature of financing itself, which directly affects the sustainability of growth. A sustainable financial system needs sustainable mechanisms of finance Even in developed countries where this debt-based financial system was initially conceived and implemented, economic instability and its accompanying tragic human and societal outcomes are widespread. We have seen the European debt crisis breaking down advanced economies such as Italy, Spain and Greece. The effects of severe debt and banking crisis that surfaced in the US in the year 2007, are still haunting its highly educated and hardworking population. Thus, for half a century at least, the prevalent financial system based on debt has produced one economic crisis after another, all over the world, with disastrous human consequences such as widespread unemployment, alarming poverty levels, uncontrollable inflation, hunger, malnutrition, and the appalling income disparity. As Pakistan struggles to find an answer to its own looming debtcrisis, its economics and finance policy makers must pay attention to the emerging thoughts in finance. Quite a few contemporary economists and finance thinkers are increasingly blaming a financial system run by banks, which as we know is based on debt, for recurring financial and economic crises all over the world. Books with international acclaim, as well as articles in well-reputed newspapers have been published in the last few years. They highlight the economic instability and subsequent human suffering created across the global board. Some academics in the field of finance and economics have even proposed a reduction in the size, power and influence of banks, while others have suggested making interest payments more variable to share the risk with the borrowers, when the latter face financial constraints due to unpredictable market conditions. In a nutshell, the current debt-based financial system is increasingly being questioned for its devastating effect on the economy of a country. The world seems to be very slowly, and involuntarily, moving away from a debt-based economy. It is strongly suggested here, that the only way to create a sustainable financial system; is to focus on equity finance as the main mode of financing in an economy. When an entity raises money through equity financing, its investors share; the real profits of the venture alongside its losses; in proportion to their respective ownership of the entity. In equity-financing, it is well-recognised that profits may vary depending on business conditions that are not in human control, where the risk of losing the original funds invested is always present, despite the business’ best efforts. Thus, an equity-based financial system is characterised by the principles of fairness and justice for all participating investors, unlike an evidently exploitative debt-based financial system where the lender does not share the risk of the business with the borrower. Will Pakistan’s top finance and economics policy makers, who are currently proposing more borrowing as a short term solution to Pakistan’s economic woes, wake up to the fundamentally unsustainable nature of a debt-based financial system, and seriously work on developing a viable and sustainable alternate to it, that is, an equity-based financial system. The writer is a former Commonwealth Scholar from Pakistan for UK, and Fulbright Scholar for USA, in the field of Management with special interest in Corporate Governance, Business Ethics and Sustainability. She can be reached at [email protected] Published in Daily Times, September 13th 2018.