Finance Transition Dialogue #1: What’s the Problem here?

Risk pricing models, governance, culture, externalities, silos, regulatory capture, shareholder value, fear, need for empowerment, lack of diversity, limited supply of investable assets: these are just some of the concerns put forth at the first of North Star Transition’s series of Finance Transition Dialogues held on June 10, in partnership with University College London’s Climate Action Unit and Preventable Surprises. What’s next? Matthew Phan investigates.

How do you manage change in complex systems?

At the first of a series of three Finance Transition Dialogues, held on June 10, 2021, North Star Transition convened around forty participants including influential voices from within the financial system including banks, asset owners, fund managers, and those outside the system with insightful perspectives to offer including thought leaders, consultants, think tanks, academia and government.  This diverse group gathered to discuss the limits of an ESG-focused approach to tackling systemic challenges such as climate change, biodiversity loss, and social inequalities. In a context of high societal expectations about the role of finance, we spoke about culture, emotions and human dynamics, about power and governance, and about the mechanics of investment – and how these interact within financial systems and what emerges from it.  

Our sessions are designed and facilitated to enable a diverse group to actively listen, then summarize and present each other’s ideas and draw out themes.  Our process is based on how giving an exponentially growing group of people a sense of agency (the ability to act) can lead to large-scale change.  

Themes that emerged from a highly participative session included: 

• Investment challenges 

• Lack of investable assets that are truly regenerative 

• The impossibility of trading one’s way out of a systemic crisis 

• The limited nature of mental models or conceptual frameworks 

• Risk pricing models that do not take time horizons, externalities and environmental contexts and tipping points into account 

• More broadly, a lack of cognitive diversity in finance 

• A failure to link environmental and social impact to financial outcomes, reflecting challenges around measurement, data, accounting and disclosure 

• ESG can confuse output with real impact, leading to greenwash 

• Governance challenges and inadequacy of system-level incentives 

• the need for regulation 

• The limits of market-based incentives alone  

• Reframing the role of government as a partner rather than as hindrance 

• The significant political power of financial markets across jurisdictions combined with the imbalances vs. other stakeholder groups 

• Organizational challenges, such as 

• Internal silos, which prevent environmental concerns being taken seriously into account in key business or financial decisions 

• Lack of agency of concerned individuals, while individuals with influence have divergent business priorities and incentives 

• The need to retrain people and change culture on the ground, to understand the issues and bring these values into day-to-day workflow, and to address the lack of cognitive diversity in the finance sector 

• The financial sector’s distance from the real world, as manifested in: 

• Sense of a privileged minority, elitist mindsets, etc 

• Regulatory capture, or, in stronger language, “degraded democracy” 

• A question of values: 

• Is our view of shareholder value too narrow? 

• If environmental concerns cannot be factored into financial returns, should fiduciary duty embrace more than returns? 

• What is the purpose of finance and of financial institutions, more generally, in a society? 

One final point to raise, though, is the question of diversity. What perspectives are we missing? A participant in Asia pointed out that, with a largely American and European participant mix, much of the conversation revolved around values, philosophy and the role of government. In Asia, business, not policy, is seen as the means to change the world. System dynamics are accepted and worked with, rather than changed. Interest in sustainability is hard-nosed and focused on investable business opportunities.  

This point is welcome – we acknowledge the limits of any particular world view, and continue to call for participants, mindsets and ideas across paradigms. 

Our team is working to explore the full range of ideas shared in the session, and will analyse them in combination with the insights draw from the second dialogue session (to be held July 12) focused on possible new solutions drawn from answers to the question “What are the objectives and principles of a more truly regenerative financial system?”. In the third session we will explore the themes that have emerged and consider the actions that are needed to bridge the gap from challenge to action. This will feed into the next phases of the Finance Transition Lab, with phases 2 and 3 moving into workstreams and outcomes. As ever, our focus is on driving impactful action, not just being a talking shop. 

Challenges abound. We are heartened by the constructive honesty of the participants. We look forward to engaging further on these issues, and more.  

In assembling this summary, Matthew Phan had support from:

Jenny Scott, and Jyoti Banerjee, North Star Transition;  Jerome Tagger, Preventable Surprises;  Kris de Meyer and Lucy Hubble-Rose, UCL’s Climate Action Unit.