Insights

Business as usual in a burning building

A systems-level problem like climate change requires a system-level solution, but so far the financial community has been happy to play at the margins.

Stephen Barnett, CEO

The reviews for this year’s Global Impact Investing Network (GIIN) conference are in, and, on the whole, they’re glowing.

One publication observes that “although the impact investment industry is often rife with empty words, this year the GIIN-goers wanted to tackle the problem head-on.” Across the pond, another suggests the action is “getting hot,” citing attendees who variously claimed “the time for empty words is over” and “we need to move capital at a vastly different scale.”

Really?

I had hoped the GIIN Conference would deliver in the ways some have claimed it has. I had hoped we might — finally — move beyond the party lines, towed by delegates and panellists towards something that captures the anger and urgency inherent in other social and environmental movements unfolding across the world.

What I saw instead was business as usual.

We applauded our industry’s incremental achievements, hailing asset managers that allocate a fraction of their holdings to social and environmental impact. We played a tried and tested blame game, slating data providers, lamenting ambiguous standards and cursing internal processes: all factors keeping the impact investment revolution contained. We held court during networking sessions, promoting our incremental progress, before flying back home to get on with the proper business of investing.

We talk the talk but don't walk the walk

Maybe I had unrealistic expectations. Conferences are, by nature, a lot of talk and not much action. Conversely, it’s easy to get carried away by the anger and direct action currently on display in the global climate strikes, where participants are sacrificing time, money and a clean criminal record to highlight the scale and urgency of the climate crisis.

Unfortunately, the emotional strength of these movements tends to hit a brick wall of market and industry forces. For all our verbal commitments to sustainability, we’re still only rewarded based on the financial rain we make or save our companies. The bottom-line for every investor, no matter how well-intentioned, is financial. Sustainability is voluntary.

In such a financial framework, is it any wonder that the arguments made by the Greta Thunberg’s of this world are subsumed under the weight of our entrenched global financial system?

The tug-of-war between climate and finance

There have always been frustrations levelled against our global financial system, with grassroots movements registering an infrequent flurry of counterpunches easily withstood and repelled.

What is new is the scale of the issue at hand. Climate change has the clout to go toe-to-toe with our existing economic and financial model. Concerns about the indiscriminate and irreversible effects of global warming are no longer the preserve of hippies and activists. Its impact on our environment, society and — yes — financial systems, is total.

While addressing the impending climate crisis is a globally significant mandate, systems and structures to support a zero-carbon future are virtually non-existent. In the tug-of-war between climate change and the global financial system, it’s obvious which system has historically triumphed.

A systems-level problem requires a systems-level solution

It shouldn’t really be a surprise that traditional investment concerns trumped good intentions at the GIIN conference. The problem is, we’re trying to improve a system that has been uniquely successful in its pervasive integration with other structures of power. A systems-level problem like climate change requires a system-level solution. Everything else is just counterpunching.

So what are the options?

We could wait to see whether markets correct for this ‘externality’. Let’s be honest: they simply won’t do so in the time we have before the climate crisis is truly upon us.

We could wait for the system to weaken, using it as an opportunity to build it back up the ‘right’ way. But that proved to be an almost total failure in the aftermath of the financial crisis.

We could financially incentivise positive climate action and disincentivise negative climate action (for example, at tax on Co2 emissions). However, that does little more than to internalise the climate change system within the global financial system. The financial bottom-line remains indelible, with climate change reduced a pounds and pence transaction. In this context, we leave climate change exposed to the market forces that care little for the commons.

Saving the financial system from itself

Out of options then? Not quite. There are two other possible ways in which investors could elevate the climate system to the level of the financial system.

First: we could work towards a future in which it’s fiscally irresponsible to allocate capital to organisations and governments that act with impunity towards the climate. If investors boycott organisations that produce unsustainable products in an unsustainable way, profits will decrease, outlooks will worsen, and the market will move away from the underperforming assets.

In this scenario, the system imbalance starts to correct itself. Market movements are entirely dependent on the risk and return profiles of underlying assets. As climate change starts to play havoc with our traditional understanding of risk and return, the global financial system will have to adapt to the climate system.

Second: we could promote a new way to measure and reward the success of companies and investors. Were we to create a new ‘unit’ that measures the social and environmental performance of people, companies and investors, we could mimic the simple efficiencies of financial markets.

Measurability and comparability have been integral to the growth and efficacy of financial markets. A similar unit applied to the climate system would create a peer of equal weight in capital allocation decisions.

The solution is there, but is the impetus?

Taken in tandem, these two routes — disinvestment and introducing a new non-financial metric — could revolutionise the progress being made to fight climate change and save the financial system from itself. The question is whether the financial community is ready to embrace systems-level change to tackle the systems-level challenge threatening our industry and planet.

Here’s hoping I’m not asking the same questions after the GIIN conference in 2020. Unfortunately, we don’t have the luxury of a year to continue ruminating.