Financialization refers to the ever greater role that capital markets play in our lives. At an individual level, this has been accompanied (or driven) by the concentration of wealth in the hands of a small financial elite, the social effects of which were partially managed by debt-fueled consumption (and more widespread share ownership) in industrialized countries. At a collective level, it has made trading in money and derivatives far more profitable than goods and services, and resulted in an ever wider range of complex financial instruments. This shift has increased the power of financial corporations, such as banks, insurance companies and hedge funds. It has also changed how non-financial companies are run, so that generating short-term ‘shareholder value’ is favored over making long-term investments.
The combined effect of these trends is too much capital chasing too few profitable opportunities, resulting in a relentless search for new assets. This has seen a boom in speculation on commodities (like corn and oil), spurred on by financial deregulation. It has also seen the creation of new commodities, such as carbon and ecosystem services, in a process that has been described as the ‘financialization of nature’.
The causal relationship between different aspects of financialization is subject to heated debates, while the generalized nature of the descriptions it provides have led some critics to question its usefulness as a framework for addressing changes in climate finance.