How capital allocation can rebalance capitalism in a changing world

There are multiple ways in which incentives could be changed to lead to different economic systems. In an extreme scenario, widening inequality, AI-driven winner-take-most dynamics, climate shocks and eroding institutional trust lead to social protests and political revolutions — and eventually to the collapse of the capitalist system. This abrupt upheaval destroys much of the value that has been created.

In another scenario, governments pursue the goals of economic security and self-reliance in more significant ways. Government intervention in economies — including via industrial policies, trade and investment restrictions, and the creation of national champions and state-owned enterprises — around the world could continue to grow. This could lead to a state capitalist system in which governments direct economic activity or own significant productive resources, with the private sector playing a smaller role in value creation.

There is a third pathway. Incentives could be adapted — introducing new ones while retiring outdated ones — to build on some of the momentum already in place toward more diverse allocation of capital and broad-based investments in financial, human and natural capital. This rebalanced capitalism would preserve the central role of markets and prices while expanding the parts of the system that are priced in those markets. And it would expand the incentives around capital allocation to optimize for both short-term profit and long-term value creation.

This article explores the pivots that could enable this transformation of capitalism.

• Chapter 1: Expanding incentives to rebalance capital allocation
• Chapter 2: Changing incentives to redirect resource allocation
• Chapter 3: Expanded opportunities and value creation in rebalanced capitalism
• Chapter 4: The vision and pathway to capitalism rebalanced

Capital today flows disproportionately toward a narrow set of firms, assets and themes. Financial data shows that global portfolios remain heavily weighted toward equities, while within equities, market capitalization has become increasingly concentrated. Venture funding patterns reinforce this trend: capital pools and funding amounts have grown faster than company creation, concentrating investment.¹² This concentration is driven in large part by the perceived need to grow companies as quickly as possible and investors’ desire for above-market returns.

As BlackRock Chairman and CEO Larry Fink said in his 2025 Chairman’s letter, “We’re repeating a mistake from the earliest days of finance: Abundant capital. Deployed too narrowly.”¹³

Colm Devine, EY Global Vice Chair for Sustainability, agrees. “Capital allocation has an unstructured bias — it consistently flows to scale and concentration.”

There are three pivots that could reallocate capital in productive ways. These pivots would expand the incentives of capitalism to complement short-term profit maximization and financial returns with objectives regarding diversification, resilience and long-term returns. These additional incentives would set capitalism up to better optimize for long-term value creation and expand opportunities to a wider array of individuals, sectors and markets.

“Markets reward what they measure,” argues Witold Henisz, Vice Dean and Faculty Director, Impact, Value, and Sustainable Business Initiative at The Wharton School of the University of Pennsylvania. “Expanding what counts as value changes where capital flows. We need to measure total value created — not just returns to shareholders but also impacts on human and natural capital.”

Pivot 1: Government budgeting moves from a spending to an investment mindset

The first pivot is in government budgeting. Traditional measures of fiscal sustainability, focused on budgets, deficits and debt ratios, fail to capture whether government spending actually delivers impact for citizens and the broader economy. As explored in a collaborative report (via EY.com Canada) by EY teams and the Official Monetary and Financial Institutions Forum (OMFIF), governments could pivot to measure value by linking expenditures to real-world outcomes.

As Mark MacDonald, EY Global Public Finance Management Leader and co-author of that report, explains, “Today’s system allocates capital efficiently in the short term but struggles to connect investment to long-term socioeconomic outcomes. Much public expenditure is treated as spending rather than investment — optimizing for speed and visibility rather than long-term impact.”

This pivot requires reallocating resources toward higher‑value outcomes by investing in a country’s long-term productive capacity. For instance, International Monetary Fund (IMF) research shows redirecting at least 1% of GDP to infrastructure or education from less-productive uses can raise output by 1.5% to 3.5% in advanced economies,¹⁴ and up to 6% in emerging markets and developing economies. Similar research by EY forecasts productivity and economic growth tied to public investment in technological infrastructure, demonstrating a 3-to-1 return on such investment.¹⁵

Policymakers could pivot their incentives in this way by embedding an investment‑based fiscal framework into public finance, such as outcome‑linked budgeting and multi‑year capital accounting for technological capital, infrastructure and human capital. They could also explore new economic metrics — beyond GDP growth — to demonstrate impact, as explored in the 2020 edition of the EY Megatrends report (pdf).

Pivoting government budgeting from a focus on short-term spending to a strategy of long-term investment could improve the economic returns to government budgets. But, as discussed in the EY 2026 Global Economic Outlook (via EY.com US), in many countries, governments are constrained by rising debt burdens and higher interest expenses, which are amplifying sovereign-yield pressures and limiting fiscal flexibility. Global debt exceeds 235%¹⁶ of world GDP, indicating only a limited post‑pandemic correction.

As Aruna Kalyanam, EY Global Tax Policy Leader, points out, a related pivot may be needed around how governments collect revenue. “The tax system is one of the most powerful tools governments have to rebalance incentives — but many tax systems have not kept up with how income is being created (including in the digital space), how complicated tax rules can make it difficult to collect revenues, and how revenue needs have grown,” says Kalyanam. “Of course, the balance between taxpayers’ interests alongside state interests to promote wellbeing and fairness has always proven challenging, especially when bringing in questions of competitiveness.”

There are three basic ways in which to expand government revenue to fund long-term investments: grow the economic base to collect more revenue; improve tax compliance by making it harder to evade taxes, including by coordinating across jurisdictions; or increase or introduce new taxes on commercial activity, income or consumption. Tax increases are generally the most difficult to achieve politically, even though they might enhance the fairness part of the equation. Policymakers in each country would need to explore what may be feasible in each jurisdiction, so that government budgets have the fiscal resources needed to invest to foster long-term economic growth in a system that is not overly burdensome in terms of compliance and complexity.

Another way in which budget-constrained governments could explore financing long-term investments is to continue to explore the use of private capital to develop economic infrastructure. But private capital is more globally mobile and selective than state capital, flowing to the jurisdictions that offer the best risk adjusted market returns. So the traditional public-private partnership (PPP) models may need to evolve into more nuanced and commercial private capital financing structures.

Pivot 2: Investors balance short-term profits with long-term returns

The second pivot is more long termism among investors. Some investors already have structurally long investment horizons. These include pension funds, sovereign wealth funds (SWFs), and many family offices. SWFs, in particular, have become increasingly significant long-term investors, with their assets tripling¹⁷ over the past 15 years. Their long-term goals mean that many of these investors allocate capital toward companies and assets that will provide financial returns over decades rather than quarters.

Longer investment timelines are also becoming more common. US private equity (PE) holding periods reached 6.4 years¹⁸ in 2025, the longest in two decades. Globally, 61%¹⁹ of buyout‑backed companies have been held for more than four years — well above the 10-year average of 53%. While there may be multiple reasons for this shift, it nevertheless points to longer investment timelines.

Other investors are pivoting to incorporate factors beyond short-term financial returns when allocating their capital. For instance, the EY 2024 Institutional Investor Survey highlighted that for 10 years there had been a growing trend toward institutional investors increasingly seeming to care about, and embed, environmental, social and governance factors into their decision-making. Similarly, a recent Morgan Stanley survey found 86%²⁰of asset owners expect to increase the share of their portfolios allocated to sustainable funds over the next two years, up from an already high 79% in the previous year’s survey.

Investors are putting pressure on boards and management to focus on sustainability issues as well, particularly in Europe. In the 2025 EY Long-Term Value and Corporate Governance study, 91% of the European companies felt the pressure from investors to accelerate their sustainable business practices, and 78% felt it from activists.²¹

That means many investors must meet both short-term obligations alongside these growing long-term expectations. As FCLTGlobal points out, this means that even the longest-term investor must manage across multiple time horizons — oftentimes without systemic support or guidance on long-term metrics.²²

As innovation strategy expert Larry Keeley notes, “System change doesn’t come from a single innovation. It requires coordinated shifts across incentives, ownership, leadership and narrative.”

Systemic change would require a pivot in government policies and regulations to institutionalize some of these emerging behaviors at the system level. This could include encouraging longer holding periods through governance and disclosure rules, aligning executive compensation and stewardship obligations with multi-year value creation, integrating sustainability-related risk factors into fiduciary duty and reporting standards, and reducing short-term market pressures. Such regulatory pivots could allow emerging investor behaviors to be institutionalized at the system level rather than remaining voluntary or cyclical.

As Anna-Lisa Miller, CEO of Ownership Works, argues, “Since 1989, concentrated ownership of corporate equities has been a primary driver of the widening wealth gap in America. Expanding access to this massive source of wealth is essential for low- to moderate-income households — and employee ownership is one of the most effective ways to do it. When employees have a stake in their company, performance improves across the board: financially, culturally and operationally.”

Early data across the Ownership Works network suggests that shared ownership programs consistently lead to better outcomes. Following program implementation, 77% of companies reduced turnover — by a median of 30% — while 75% of companies saw improvements in safety. Notably, 100% of companies with employee ownership outperformed comparable deals on internal rates of return.

There is already a trend among PE firms to include more workers in portfolio company profits. This broader worker participation in PE value creation is pushing employee ownership deeper into portfolios, helping to scale these aligned‑incentive models.

Certified B Corporations — traditional corporations with modified legal obligations that commit them to higher standards of purpose, accountability and transparency — are another example of this pivot in practice. The number of B-corporations globally has expanded by 131%²⁴ from 2007 to 2024. And recent revisions to the B Corp framework have materially raised the bar, making impact requirements both more rigorous and more operationally demanding — which could help to explain the lower growth rate in recent years.

As Andrew Davies, CEO of B Lab Australia & Aotearoa New Zealand, argues, “The idea of a company’s purpose is given to you — profit maximization — unless you make it otherwise. A purpose statement enables a company to have a social goal while making money. It gives them an understanding for why they’re in business — otherwise the ‘why’ is just profit.”

Other corporate governance mechanisms matter as well. For instance, executive pay incentives that are tied to multi‑year value creation, equity that vests based on resiliency metrics and incentives that favor reinvesting profits in the business rather than stock buybacks could rebalance management decisions toward long-term financial outcomes and sustainable growth.

Importantly, none of these pivots abandon profit as a company objective. Rather, they expand the idea of returns and value creation from solely short-term shareholder value to both short- and long-term stakeholder value.

However, as Christopher Marquis, Professor at the University of Cambridge Judge Business School explains, “For successful change, we need both the private and public sector. The private sector can provide the innovations, establish businesses cases and demonstrate scalability. Then the public sector needs to turn all of that into policy.”

We can already see aspects of this stakeholder value system in some markets around the world. Evolving governance models reveal distinct pathways across economies. For instance, Japan is moving toward a hybrid corporate governance system that blends shareholder- and stakeholder-oriented characteristics. Managers prioritize the benefit of employees rather than shareholders, which typically results in fewer conflicts of interest and agency problems.²⁵ And in several European countries, works councils advocate for workers’ rights at a company and are involved in critical business decisions.

These systems provide examples that policymakers in other countries could leverage in pivoting their own policy and regulatory frameworks to stakeholder value maximization. The specifics may be different in each jurisdiction, but the goal would be to align corporate governance regulations and legal reforms so that companies are incentivized to measure value creation across both short-term and long-term financial, human and natural capital.

There are still some implementation challenges associated with carbon markets today. As EY Global Vice Chair for Sustainability Colm Devine points out, “Trillions of dollars in climate finance need to be deployed annually to remove carbon from the atmosphere. For these markets to have impact at scale, they need to be interoperable across jurisdictions with moves toward standardization and data integration.”

These challenges are not insurmountable. But they do require policymakers to establish effective rules and systems for pricing carbon and other negative externalities (e.g., nature loss, pollution, water overconsumption) and regulating these markets. Robust, mandatory carbon pricing mechanisms would enable such markets to arise within jurisdictions. Coordination would also be required at the global level, though, to enable interoperable emissions trading systems across jurisdictions. The current heightened level of geopolitical tensions makes it difficult to advance multilateral initiatives, but such efforts would likely be required to provide the systemic support for this pivot.

Taken together, these six pivots could use the power of market forces to expand opportunities to more individuals, companies and markets. They would also support more resilient long-term value creation, with returns across financial, human and natural capital. This rebalancing of capitalism would create three key opportunities.

Opportunity 1: Entrepreneurship as a growth driver

The diversification of capital allocation could increase financing opportunities for entrepreneurs. Micro, small and medium enterprises already play a vital role in the global economy, accounting for about 70% of total employment.³⁷ In the US alone, small businesses have generated over 70% of net new jobs since 2019.³⁸ And since entrepreneurs are highly connected to their local economies, they can be more attuned to local problems that can be solved profitably.

“Entrepreneurs are the catalysts for rebalancing capitalism and social impact. They translate purpose into scalable solutions that create long-term value,” says Stasia Mitchell, EY Global Entrepreneurship Leader.

For example, Dr. Kiran Mazumdar-Shaw, EY World Entrepreneur Of The Year™ 2020 winner and Founder and Executive Chairperson of Biocon, was failed by formal systems of capital — banks, hiring markets, venture networks — in her first decade as a founder. But she led Biocon to become India’s largest biopharmaceutical company, employing more than 16,000 people, and delivering high-quality, affordable medicines at scale. Dr. Mazumdar-Shaw embraces “compassionate capitalism,” reflecting her belief that social initiatives must be embedded into business models to drive sustainable value.

Entrepreneurship is already gaining momentum. Across the G20 member economies, the percentage of individuals aged 18 to 64 engaged in early stage entrepreneurial activity has nearly doubled since 2005. And 95% of entrepreneurs expect continued success, with the majority reporting growth and rising revenues through early 2025, according to the April 2025 EY Entrepreneur Ecosystem Barometer (via EY.com US). But access to capital is a common constraint. In the US, for instance, only about one-third of entrepreneurs who sought funding for their business were able to secure it.³⁹

Redirecting more capital allocation to entrepreneurs — especially among underrepresented groups and in emerging markets — can turn innovation into job creation and new value, creating a flywheel between financial and human capital.

As Usha Rao-Monari explains, “Entrepreneurs and the private sector bring two critical assets — capital and innovation — that can drive long-term economic transformation when aligned with broader societal goals.”

The current capitalist system delivers what its incentives reward. But growing pressures are exposing strains. If capitalism’s incentives diverge from what most stakeholders now expect it to deliver, economic fragility and public backlash can rise, destroying value rather than creating it.

To allocate capital differently and rebalance the system, the incentives for policymakers, investors and companies would need to change. The six pivots above can expand the incentives driving capital allocation, and redirect resource allocation. Many of these pivots are already occurring in certain corners of the global economy, providing test cases and the opportunity to scale. If these pivots are to occur at the system level, they would in many cases require changes in government policies and regulations.

As Ravi Venkatesan, Chair of The Global Energy Alliance for People and Planet, points out, “We regulate factories, utilities and banks. But we are still learning how to regulate platforms, data monopolies, algorithms and AI systems. The goal is not heavy-handed intervention — it is legitimacy, guardrail and trust. Without credible oversight of digital power, the backlash will intensify — fueling anti-market politics and regulatory overcorrection. Adaptive regulation is pro-capitalism because it sustains social license.”

Rebalancing capitalism therefore requires deeper collaboration across the public and private sectors. The public sector can provide the enabling environment and incentives needed for rebalancing, while the private sector can develop new products and services that help deliver government objectives while also making a profit. For example, pharmaceutical R&D to treat chronic diseases can help to keep citizens out of the hospital and in productive employment — creating value across both financial and human capital.

A rebalanced capitalist system would not suppress growth — it would broaden it. It would constitute a transformation of capitalism into a market-based system that optimizes for both the short term and the long term, investing in a more diverse set of resources and maximizing returns on a wider array of capital across the financial, human and natural dimensions.

This transformation could unlock entrepreneurship at scale, turn trust into a durable source of competitive advantage, and reignite productivity growth through better capital allocation and human‑machine collaboration. It could widen participation without sacrificing long-term performance and strengthen resilience without rejecting profit.

Pivoting proactively to this expanded set of incentives, before shocks force a potentially painful correction, could not only help stabilize the system now but would also better position economies and organizations to invest and grow in the future.

1. Government spending and investments

Public sector leaders should explore the pivots associated with government budgeting and investing in infrastructure for human resources in tandem. Both relate to how the public sector can create the conditions for long-term economic growth and prosperity in their economies while maintaining fiscal discipline.

• Investment. How could government budget cycles and processes change to enable investment-based fiscal frameworks into public finance? How could public sector leaders better assess, attract and incentivize private and other sources of capital to fund economic infrastructure?
• Public buy-in. What needs to be communicated to citizens and voters about what these pivots will entail in terms of trade-offs, timeframes and expected outcomes?

2. Tax systems

The pivots associated with pricing externalities and reallocating companies’ capital toward innovation and talent likely require a reexamination of countries’ tax systems. Policymakers need to determine if current tax policies adequately incentivize the private sector to invest in natural and intellectual resources, while making sure tax fairness will allocate revenue obligations appropriately. An effective tax system, with adequate, simple and fair laws that are not overly burdensome is critical for governments to finance the public sector investments mentioned above.

• Incentives. What does the current tax code incentivize companies to do with their capital – and what changes may help policymakers to rebalance capitalism to serve simultaneous goals of promoting wellbeing and economic growth?
• Revenue. Does the current tax system provide policymakers with the revenue necessary to make long-term investments in their economies and people? How should deficits be managed in order to optimize spending in a way that serves the simultaneous goals of promotion of wellbeing and economic growth?
• Looking forward. How are future revenue needs balanced with tax system designs?

3. Regulations

As highlighted above, there are already trends that support the pivots related to long-term investments and stakeholder capitalism. To date, however, these have been largely private sector-led, voluntary phenomena. Policymakers should consider how they could adapt their regulatory frameworks to rebalance capitalism in more systematic ways.

• Corporate governance. Do current regulations on corporate governance incentivize private sector organizations to optimize financial, human and natural capital in the long term? What could be copied or adapted from corporate governance systems in other markets?
• Fiduciary duty. How are incentives and obligations of company directors and company investors aligned with long-term value creation? How can fiduciary duties better incorporate the nurturing of financial, human and natural capital over both the short and long term?

Three actions will determine which organizations lead through this transformation and which will react to it.

1. Anticipate the impact of systemic shifts

The pivots associated with government budgeting and pricing externalities require active monitoring and anticipatory positioning of a company’s strategy and business model, including by building these scenarios into strategic planning. Leaders should anticipate how such systemic shifts could affect their organization and rethink their strategies by asking two sets of questions:

• Context and disruption. What market and societal forces are shaping the organization’s ecosystem? Where is disruption most likely to come from?
• Geostrategy. In which global markets should the organization operate? How might geopolitics, sociopolitical dynamics and regulation shape those choices?

2. Reposition capital strategy

If investors pivot to incorporating non-financial and long-term metrics into their capital allocation decisions and companies are disincentivized from financial engineering, boards and C-suites will need to rethink how they raise and deploy capital. There are several aspects of their capital strategy that may need to be reimagined:

• Asset structure. How should we reshape our asset base to balance efficiency with resilience across financial, human and natural capital?
• Finance. How do we fund our asset structure, given our cost of capital, investor expectations and time horizon constraints?
• Metrics. How should the organization track success beyond short-term financial profit? What metrics can capture the maintenance or creation of human and natural capital? How can long-term value creation be measured?

3. Challenge current governance and talent models

The pivots to investing more in human resources and focusing on stakeholder value maximization would require changing global talent pipelines, corporate governance, metrics and reporting. Leaders should evaluate alternative governance arrangements, such as employee ownership models, stakeholder advisory structures, and expanded board mandates. Directors and management need to align on the answers to several questions:

• Purpose and ambition. What is the organization’s purpose, economically and socially? How do those ambitions reinforce (or constrain) each other?
• Strategic focus and alignment. Which of the organization’s priorities matter most? Which stakeholders — including talent and investors — must be actively brought along?
• Corporate governance. What governance model is resilient enough to absorb shocks, yet flexible enough to adapt to a shifting operating environment? How should ownership and incentives structures adapt?
• Leadership. What would it take to lead, personally and institutionally, through a sustained transformation to rebalanced capitalism?

Additional EY contributors to this article include Jessica Cunningham, Lakshita Chadha and Michael Wheelock.