The capital and finance innovation panel at COP26’s innovation hub saw many challenges being put to financiers across the globe, testament to the frustrations of citizens at the perceived lack of effort. At ‘one minute to midnight’, lip-service can no longer be tolerated and the time has come for net zero commitments to be underpinned by action.
The panel considered what would be needed to deploy resources to avoid the ‘uncontainable’ public anger that may loom before us. The conclusion? Go big or go home. The time has come for our financial system to expand from one that has served the few to one that serves everyone.
First, we must redefine the fiduciary concept into one that does not provide excuses and goes beyond restricting negative actions to a positive duty to act. The proposals in Aviva Investors’ white paper ‘Harnessing the international financial architecture to deliver a smooth and just transition’ warrant consideration.
A convention on fiduciary duty and climate change should be developed to enable financiers to act, rather than to passively wait for a mandate to be defined for them. Public organisations, such as the Organisation for Economic Co-operation and Development and International Monetary Fund, must take active steps to promote change. Collaboration between public and private institutions must give voice to and implement recommendations from the Coalition of Finance Ministers for Climate Action and Network for Greening the Financial System.
Second, we must redefine portfolio themes from siloed verticals into holistic collections that recognise the interconnectedness of human existence. Oversimplifying the complex and investing in related segments in isolation has proven to result in suboptimal resource allocation. We have to invest in long-term sustainable value and apply existing concepts, such as diversification, to meet today’s needs. Why build transportation hubs without also investing in the associated production facilities, education and essential services needed to elevate a community? The focus on investing on the basis of most-return creates an imbalance in risk distribution, as pointed out by Ed Cox of the West Midlands Combined Authority, with public organisations bearing the risk of innovation and community outcomes, while private organisations reap the rewards from lower risk investments.
This brings us to policy. A common complaint is that well-advised projects gain more traction, while the connected ecosystem might be neglected. This is where policy-makers may be missing an opportunity. With much physical rebuilding taking place, there are opportunities to require projects, such as the creation of charter cities and the development of cities such as Ibu Kota Negara, be treated as test beds for the development of wholly connected, green cities. Consistent with endeavours like the European Union’s mission 100 climate neutral and smart cities by 2030, this would give policy-makers a collaborative space in which they could create and deploy practices bearing in mind the future of their communities.
This would also give investors the chance to correct mistakes in today’s markets. We could design for equality of access and opportunity, and for the preservation of culture and heritage, while creating incentives for shared prosperity. There are already ways we can see this happening: France tied state aid for carbon intensive industries to emission-reduction requirements and Denmark denied aid to companies who use offshore tax havens. These steps take us towards problem-solving and away from enabling. Yet, as Cox highlighted, it remains difficult for local governments to engage with investors on these opportunities. The International Finance Corporation’s advisory services and the Global Steering Group for Impact Investment’s national advisory boards could help build bridge these gaps.
Finally, we should redefine return expectations and time horizons for this return. Investors need accepted frameworks under which they can appropriately rate what we have not previously valued. Our focus has been on financial reward and we are only beginning to recognise environmental impacts. Conversations about just transitions and social factors make it clear that this is changing. The questions are how much and how soon.
Together, these changes create a context in which institutions are supported in transitioning their portfolios and helping their stakeholders to change. Institutions need to be properly incentivised, with rewards for deals that support transition and penalties for those that do not. Policy-makers also need to be incentivised. Governments still plan to extract more than twice as much coal, oil and gas in 2030 than can be tolerated to meet the safest temperature goals in the Paris accord. Members of organisations like the OECD and G20 should consider positions on sustainability and how they enable transition.
The panel ended by discussing how these incentives could be designed. A mechanism to bring future value into the present is needed to help the deployment of finance. Many possibilities exist, such as a citizens’ dividend or tokens representing securitised future value that can be appended to existing financial products and redeemed as milestones are realised. New relationships should be forged between economic actors to tackle today’s challenges. However, we don’t think or act extensively enough. We are improving but, with the planet burning, it’s time for moon shots. The trouble is that financial institutions are not valued for thinking big; they are valued for their results and stability. This has cemented mindsets that no longer serve us well amid a changing climate.
At COP26, David Attenborough, the British broadcaster and naturalist, told world leaders that ‘the stability that we all depend on is breaking’. We must respond and experiment with new mechanisms and operating principles. We need to act to address the problems of today, as well as create systems that can better accommodate complexity and adapt. If there was ever a time where it was apt to say that time and tide wait for no man, it is now.
Tamara Singh is Adviser and former Head of Asia Pacific at OMFIF.