Investing in a sustainable future is not a philosophical question

Guest blog by Martin Rich, Co-founder and Executive Director of Future-Fit foundation

As I  reflect on 2018, there have been many highlights of which I’m pleased and proud. And yet, I’m far more worried for our collective future than I was at this time last year. Two events in particular highlight why.

Just over a month ago I attended the opening session of the A4S Summit in London and had the pleasure of speaking to Emily Shuckburgh from the British Antarctic Survey. I thought I had a reasonable grasp on how bad climate change is, and the risks we are facing as a species. As we explored the boundaries of human survival in an ever-warming world, I realised that I wasn’t even close. It’s far worse and far more urgent. Society really is nowhere near scared, or focused, enough. We are playing against odds that no-one would accept if real money were involved. (Oh, hang on a second…)

It was a timely reminder of the need to keep pushing as hard as we can.

The other significant event occurred in October while I was attending the UNCTAD World Investment Forum at the UN in Geneva. Having listened to a long stream of well-meaning, but deeply unimpressive speeches from various global managers as to how they were single-handily tackling all of the SDGs – within the confines of fiduciary duty and market rates of return, of course– my patience (something my wife tells me is a work-in-progress) finally ran out.

During one particular audience Q&A session I (politely) pointed out that 100% of invested assets have an impact on society and the planet – both positive and negative. But we don’t know – and often don’t ask – what these are. And while I completely understand the (self-imposed) issues of fiduciary duty and market rates of return, these will do us no good whatsoever as we speed towards (and shortly over) the various cliffs of climate change and social destruction. Surely, I suggested, it was time to consider putting investment for the survival of our, and indeed all, species as the priority, rather than a nice to have after inflation-plus-5%? Indeed, isn’t this idea the very basis of the SDGs which have been much lauded every day at this very event. And given that we are in the UN, I thundered (probably with a Churchillian outstretched finger), isn’t this the right place to convene our leaders and for such a debate to be held?

The panel went white(r).

Had there been tumbleweed in the building, it would have rolled past.

The scribbling that I initially thought was the UN General Secretary adding this rather marvellous idea to the agenda for Davos turned out to be the Chair of the panel crossing me off her Christmas card list.

She was clearly not impressed. After what felt like an embarrassingly long time “Who would like to answer that philosophical question?” she mused.

Err, excuse me? A philosophical question?? Surely you mean practical question?

Oh. No wonder we’re in trouble…

Finally one member of the panel bravely stepped forward, agreed with me and said this was exactly the sort of debate he would also like to hear at the UN (thank you Will Martindale at the PRI). At which point the panel was quickly whisked back to safer territory and the next question – no such debate was going to be held here, today, thank you very much.

As I sat back down, half-a-dozen business cards were shoved at me by those sat around with a “Yes – that’s exactly the question we should be asking!” At least I wasn’t alone in my cry falling on deaf ears…

And as far as I know, my suggested debate is not on the agenda for Davos in a few weeks’ time.

I have come to realise however that the most depressing part of this fiasco is the panel’s Chair was actually right. To many, this notion is still a philosophical question. The financial system is not intrinsically evil, but it is remarkably good at what it does – and to quote Stafford Beer, “The purpose of a system is what it does”. The problem is that the purpose of today’s financial system is simply to make money, not save the world. Or even, I would suggest, ensure that it moves forward evenly.

In other words, until we change the purpose of the system, nothing will really change. Asset managers will slap the SDGs on their funds and websites will proclaim more ESG-integration than you can shake a stick at. But there will be very little heart in any of it, as demonstrated by headlines like“BlackRock, Vanguard, Axa raise coal holdings despite climate fears” (FT.com, Dec 8, 2018).

Managers with more than $80trn of assets-under-management have signed up to the PRI principles, and yet the latest (2016) EuroSIF survey suggests that less than half of European assets (c.€11trn out of €25trn) actually have any form of SRI methodology applied – and the vast majority of this is simple exclusionary screening, and so hardly world changing. Indeed, the survey’s “Sustainability Themed” and “Impact” classes are probably the closest to those that might be considered to be doing vaguely enough to drive towards the future we need, and they barely scrape together €250bn – or c.1% of assets under management. Given Europe’s lead in this type of investing generally, it would be generous to extend even that percentage to global assets under management. (The 2018 USSIF report suggests roughly a quarter of US assets with some form of SRI approach, so half, proportionately, of Europe). But it hardly matters – if 99%, or even 90%, of global assets are not being invested to achieve a collectively better future, we have grave problems.

Suddenly the $2.5trn annual funding gap to achieve the SDGs looks less like an opportunity and more like a tax on being able to continue business as normal elsewhere. As I said, the financial system is extremely good at what it does.

We need leadership and we need it fast, or else the best thing we can do for our grandchildren will be to teach them to swim. It’s not going to come from our increasingly isolationist governments as COP24 has just depressingly demonstrated once again. (Or Twitter pretty much every day).

Encouragingly though, it is coming from certain areas of the corporate world. According to a Bain report from over the summer “90% of companies feel they need to change their core business model at least somewhat in order to operate in a truly sustainable economy, and 38% of companies feel that their core business model will need to change radically.”(https://www.bain.com/insights/transforming-business-for-a-sustainable-economy/) That doesn’t mean they’re all doing it yet, but at least the need has been recognised.

The financial markets have huge power to aid this transition and create a better future for us all – encouraging and rewarding the businesses that are moving in the right direction, and penalising those who aren’t or won’t. We need more headlines like this: “Standard Chartered to Stop Financing New Coal Power Plants”(https://www.bloomberg.com/news/articles/2018-09-25/standard-chartered-to-stop-financing-new-coal-fired-power-plants). But it’s time for the financial industry more generally to rewrite its purpose and get off the fence. Either help us – or don’t and we’ll do it without you. (I would say “Your loss” but the irony would be laughable). Please just stop saying you are helping when you’re not.

Looking ahead to 2019, I remain apprehensive, but still hopeful. We know what a flourishing business landscape looks like in a truly sustainable future. It won’t be a smooth and painless transition by any means, but we can get there if we want to. The financial industry can help significantly and make the transition quicker, smoother and easier. Every week I get to work with an amazing group of investors who are genuinely trying and showing it can be done. I know there are more out there – I just need to find them. (If you’re reading this, then you know where to find me).

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