• AIQ - The Macro Stewardship Edition
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The levers of change

A systems approach to reconcile finance with planetary boundaries

Financial services underpin all economic activity, which itself depends on Earth’s natural capital. Resolving their interconnected issues to bring about a just transition will require a holistic, systems-thinking approach.

Read this article to understand:

  • What systems thinking entails
  • The paradigms and feedback loops that must be changed to transform the financial and economic system
  • The key levers to enable this transformation
Growth has become unsustainable. It has never been equitable in that some live far above sufficiency, while others live far below. And no system that uses resources at a rate that destroys natural life-support systems without meeting the basic needs of all can possibly be considered efficient

The debate around the planetary limits to economic growth has been around for decades, first coming to light with the 1972 publication of the book Limits to Growth, commissioned by the Club of Rome and written by Donella Meadows, Jorgen Randers, Dennis Meadows and William W. Behrens III.1 It was long confined to the sidelines as companies, policymakers and the mainstream economists who advised them ignored the notion of Earth’s finite ability to provide resources, absorb waste and sustain economic growth.

“For a long time, we have been in pursuit of exponential growth. This pursuit has been working for a tiny minority of the world’s population, but without taking equality, justness or fairness into account. At the same time, that drive is undermining the system itself and could ultimately lead to its collapse,” says Natalie Mangondo, finance youth fellow, UN Climate Change High-Level Champions.2

“But there is also an incredible opportunity to harness the interrelatedness and interdependence of our economic and financial systems to build something better,” she adds.

Indeed, the Limits to Growth model shows that “once the population and economy have overshot the physical limits of the Earth, there are only two ways back: involuntary collapse caused by escalating shortages and crisis, or controlled reduction of the ecological footprint by deliberate social choice”.3

(Over)shooting ourselves in the foot

As highlighted in the most recent report by the Intergovernmental Panel on Climate Change and the fact Earth Overshoot Day fell on July 28 this year, we have been exceeding those limits for some time.4,5 A landmark 2018 study found that, between 1992 and 2014, the value of the stock of natural capital (defined as the world’s stock of natural assets, including all living things, but also air, water, geology and soil) per head had declined by nearly 40 per cent across 140 countries.6

According to Daly, the key limiting factor of economic growth, which used to be man-made capital, has now become remaining natural capital:

“The production of caught fish is currently limited by remaining fish populations, not by number of fishing boats; timber production is limited by remaining forests; not by sawmills; barrels of pumped crude oil is limited by petroleum deposits, (or perhaps more stringently by the capacity of the atmosphere to absorb CO2), not by pumping capacity; and agricultural production is frequently limited by water availability, not by tractors, harvesters, or even land area.”7

Daly argues “economic logic requires us to maximise the productivity of the limiting factor in the short run and invest in increasing its supply in the long run”. Today, without changing our economic logic, this means investing in natural capital first and foremost. In other words, we must make the “deliberate social choice” highlighted in Limits to Growth to reduce our ecological footprint if we are to avoid economic collapse.

According to a recent paper by thinktank Volans and EU initiative Climate-KIC, the state of the planet has thrown the current economic paradigm into deep crisis, as we can no longer ignore what mainstream economists term “externalities”. Thinking in terms of “planetary boundaries” is gaining traction, and a tipping point is approaching where economic thinking needs a radical reboot. The question is how.8

As Aviva Investors CEO Mark Versey argues, this means no longer treating responsible investing as a niche category but redeploying all capital towards sustainable investments (see Redefining stewardship: Why stakeholder capitalism needs to wake up). “Unfortunately, the incentives for asset managers and other key financial institutions to actively push for systems change and market reform are weak at best,” wrote Versey. “This needs to change.”

And because financial services – investments, banking and insurance – underpin all economic activity, which is itself dependent on natural capital, resolving their interconnected issues requires a holistic, systems-thinking approach, and identifying and activating key levers of change. One way for investors to help redefine the system is to embrace macro stewardship – the practice of actively engaging governments, policymakers, NGOs, academics and other key influencers to correct market failures on sustainability issues.9

In this article, we give an overview of systems thinking and systems change, discuss the paradigms and feedback loops needed to move to a sustainable financial and economic system, and explore the key levers of change for the financial system.

Background to and influence of Limits to Growth10

Limits to Growth used the World3 computer model to simulate the consequences of interactions between the Earth and human systems – population increase, agricultural production, non-renewable resource depletion, industrial output, and pollution generation. The simulations showed the planet probably cannot support present rates of economic and population growth much beyond the year 2100, if that long, even with advanced technology.

It has sold over 30 million copies worldwide and sparked much debate but did not break into mainstream analysis until recently.11

Today, as traditional economic analysis and policy fail to stop resource depletion, pollution, biodiversity loss and global warming, as well as rising inequality, economists and policymakers are turning to the book’s systems-thinking approach as a better way to understand the economy’s interactions with people and the planet, and to come up with sustainable solutions.

Systems thinking for systems change

Donella Meadows defined a system as “an interconnected set of elements that is coherently organised in a way that achieves something”. In Limits to Growth, she and her co-authors argued demography, the economy and the environment together embody one planetary system with innumerable interactions.12

The idea of being able to look outside the box and make connections was pivotal

“The idea of being able to look outside the box and make connections was pivotal,” says Dr. Nafeez Ahmed, director of global research communications at thinktank RethinkX, of Limits to Growth. “They flagged something very important: that natural limits or constraints can exist in nature, and we need to understand our relationship to these planetary boundaries. They also identified a resource bottleneck between 2020 and 2050, which I believe is broadly accurate.” (see Know your limits: An interview with Nafeez Ahmed).13

This means we can no longer consider the economy as a closed system independent from demography and planetary resources, or to implement policies to change these three areas separately. As Kate Raworth explained in Doughnut Economics, they are too interconnected for this to work. We need to see them as a whole, complex system, and apply systems thinking to avoid environmental and economic collapse.14

Stocks, flows and feedback loops

Systems do not always do what we want them to.

“Contemporary research attempting to assess the accuracy of World3 [the model used in Limits to Growth] suggests we are close to a potential breakdown, decline and collapse scenario, but perhaps not approaching catastrophic worst-case scenarios – although they are still possible,” says Ahmed.

Stocks and flows are a system’s core elements while feedback loops are the interconnections

In Systems Thinking for Social Change, David Peter Stroth defines systems thinking as “the ability to understand these interconnections in such a way as to achieve a desired purpose”.15

As Raworth explained, stocks and flows are a system’s core elements – notions familiar to many in the financial realm – while feedback loops are the interconnections between those stocks and flows that influence them. In every system, there are two kinds of feedback loops: reinforcing (or ‘positive’) feedback loops and balancing (or ‘negative’) ones.16

The terms ‘positive’ and ‘negative’ are not used here to convey a value judgment, but a reinforcing or weakening effect. An example of a positive feedback loop is greenhouse gases inducing warmer temperatures, which melt the permafrost, releasing methane, a powerful greenhouse gas.

Figure 1: Positive and negative feedback loops
Positive and negative feedback loops
Source: Aviva Investors, August 2022. Adapted from Rafael Laurenti, May 201617

As explained in Limits to Growth, changing a system requires changing the structure of those information links: “the content and timeliness of the data that actors in the system have to work with, and the ideas, goals, incentives, costs and feedbacks that motivate or constrain behaviour.” The authors explain this can be an extremely powerful catalyst for change:

“The same combination of people, organisations and physical structures can behave completely differently, if the system's actors can see a good reason for doing so, and if they have the freedom, perhaps even the incentive, to change.”18

Paradigms and leverage points

In Systems Thinking for Social Change, Stroth warned against quick and easy solutions that correct the symptoms rather than the underlying causes of issues in a system, as these often have unintended consequences.19

The OECD recognised this in a 2020 paper, setting out new economic goals – environmental sustainability, improved wellbeing, lower inequality, and greater resilience. It argued these should be built into the structures of the economy from the outset, alongside integrated policy and performance indicators, requiring extensive institutional innovation.20

Tackling the root causes of a problem is often difficult because it takes more time and money

Tackling the root causes of a problem is often difficult because it takes more time and money and can entail more uncertainty than applying what Stroth calls a “quick fix”.21 It typically requires changing the goals of the system (creating a “paradigm shift” in systems terms).

For instance, the way the OECD paper aims to make its new goals the primary outcomes of the economic system is a paradigm shift in its approach. The authors recognised how challenging this will be:

“We are under no illusions as to how easy or quick policy changes of these kinds will be. They will require significant institutional reform. Many vested interests will stand in the way. So we recognise that this is as much a political as an economic policymaking challenge.”22

However, as Stroth explained, systems change can be achieved by focusing on a few key leverage points, then learning from experience, expanding the resource pool, and scaling up what works: “The good news is that systems shift not as a result of making many changes, but by sustaining focus on only a few changes over time. These changes are called leverage points because they leverage limited resources for maximum long-term impact.”23

Using a number of these leverage points will be essential to transform the incentives and behaviours of actors in the financial and economic part of the system. But to identify them, we must first understand the limitations of the paradigms, structure and feedback loops of the current system.

Flawed paradigms

“Currently, the way the economy works is you make more money by exploiting planetary resources and human resources than you do by doing the right thing. That's a market failure,” says Thomas Tayler, senior manager at Aviva Investors' Sustainable Finance Centre for Excellence. “In the face of market failures, companies can only do “the right thing” until it starts to reduce their profitability because they have to answer to their shareholders.”

In the face of market failures, companies can only do ‘the right thing’ until it starts to reduce their profitability

Daly gives two reasons for this. The first is that mainstream models present the macroeconomy as a self-sustaining, isolated system – “a giant perpetual-motion machine”, independent from the Earth’s resources that can grow forever.24

The second reason is that, in economic models based on present-value maximisation, the destruction of resources or ecosystems can be the optimal way to achieve this, making companies that exterminate resources rational.25

“There is nothing within capital markets that values future generations,” noted Steve Waygood, chief responsible investment officer at Aviva Investors, in a recent article (see A tragedy of perception). “Quite the opposite. It discounts their interests and ignores the consequences of our current consumption on their very existence. As for capturing nature’s true value – of a mangrove, say – we are a long way off.”26

Yet it is crucial to change mindsets and the goals of the system to transform the system itself. Without this, economic actors will take a “minimum plausible compliance” approach to new rules and regulations, and changes will not be as effective as they should.

Shifting the paradigm

To move beyond old models into a sustainable era, we will therefore have to rethink our unquestioning confidence in economic growth, instead asking: “Growth of what? For whom? At what cost? Paid by whom?”27

Companies, investors and policymakers need to look beyond shareholder value maximisation and GDP

As the Volans white paper noted, companies, investors and policymakers need to look beyond shareholder value maximisation, modern portfolio theory and GDP. “It will take courage, creativity and collaboration to overthrow one paradigm – a paradigm based on maximising economic efficiency – and replace it with another based on respecting planetary boundaries.”28

Although recent debates have questioned the role of the financial industry and ESG investing in the transition to a more sustainable economy, macro stewardship will be central.

“One of the fundamental things missing from any debate that says this is solely the preserve of governments is a recognition of the scale, influence, and expertise of the financial system,” says Tayler. “A lot of the answers and ideas lie within the system itself.

“Yes, governments have the primary levers, but we must use our expertise and insights to ask them to give us the enabling conditions to achieve net zero, biodiversity and social goals, and help make that paradigm shift,” he adds.

This also means shifting a paradigm of finance itself: industry players need to understand they don’t have to passively accept the level of risk of the system but can instead try to influence it.

“We can affect where risks are concentrated by the way capital is allocated across the system, but we can also take risk out of the system through engagement with governments for policy change that impacts the drivers of systemic risk,” says Tayler. “We can advocate for change and governments will listen. We've seen it happen in the past, but it needs to happen on a bigger scale.”

How to achieve the shift

To change mindsets in financial services, Jess Foulds, senior manager for global responsible investment at Aviva Investors, recommends an array of approaches to change incentives – embedding long-term value creation in individuals’ assessments, for instance – and education, including MBAs and the CFA.29

It is a case of broadening perspectives rather than refuting everything that has gone before

“Academia is another area where we may need to commission further studies,” adds Foulds. “However, to get widespread buy-in, we must build on existing frames of reference. It is a case of broadening perspectives rather than refuting everything that has gone before.”

This shift is needed in both financial and economic policy. Key policy influencers and actors recognise this, and are now calling for profound change, as well as proposing solutions. For instance, Earth4All is a collective of leading economic thinkers, scientists, and advocates offering a vision for a new economic and social approach.30

Sandrine Dixson-Declève, Earth4All project lead and co-president of the Club of Rome, says: “For governments, we recommend moving beyond a singular focus on economic growth to include natural and social capital. The health of the economy should reflect progress in human development and ecosystem resilience.”

Similarly, the OECD paper stated that achieving the four goals of environmental sustainability, rising wellbeing, falling inequality and system resilience would require rethinking the dominant approaches to economic policy of the last 40 years. This would involve a new concept of economic and social progress, new frameworks of economic theory and analysis, and new approaches to economic policy.31

One arresting idea Kate Raworth – among others – picked up on is the role of economic growth in the race for global power, which Kenneth Rogoff wrote is completely ignored in standard macroeconomic models.

International relations may be one more facet of the global system we need to integrate in efforts to change the system

This notion is not much discussed among the solutions proposed to integrate human wellbeing and environmental sustainability into economic theory and policymaking. Yet, as Raworth argued: “This lock-in highlights the need for innovative thinkers in international relations to turn their attention to strategies that could help usher in a future of growth-agnostic global governance.”

International relations may be one more facet of the global system we need to integrate in efforts to change the system.32

As highlighted, these efforts will have to focus on embedding the new paradigms into the system by transforming its structure – the information flows and feedback loops that maintain it. The good news is there is precedent for this type of profound shift in previous times of crisis and change, for example in the 1940s with Bretton Woods.33

Tackling the feedback loops

Unfortunately, the interventions to date have not been of a scale or nature to deliver systemic change. 

“The finance system is critical because we have built our global economy around it,” says Tayler. “We are dependent not just on investment, but there's an absolute reliance on the insurance industry to mitigate risk, and on the banking system to provide liquidity, technical expertise, and to structure projects and infrastructure.”

If global warming reaches 3.5 degrees, the world becomes uninsurable and the whole financial system fails

Tayler adds that if the theoretical role of finance – through investment, underwriting and banking – is to allocate capital to where it will best serve society, then the financial system is not working as it should. As long as it is constrained by the current goals and rules, it will continue pursuing outcomes that are damaging for society and the planet until, if global warming reaches 3.5 degrees (the current implied warming of global stock exchanges), the world becomes uninsurable and the whole financial system fails.

“Taking a systems-thinking approach to the role of financial services, our duty to act in the best interests of clients and to promote market integrity should extend to issues that undermine markets and financial stability,” says Foulds.

“That is where we come to the review of the international financial architecture, which is one of the key asks of our International Platform for Climate Finance campaigning,” she adds.34 “The bodies that make up the financial system don't have an explicit objective to monitor or carry out the delivery of sustainable development.”

Figure 2: The current architecture does not deliver optimal outcomes for society
The current architecture does not deliver optimal outcomes for society
Note: This is not a completely exhaustive view – but highlights key global organisations due to their mandate. *Illustrative examples.
Source: Aviva Investors, September 2022

What needs to change

To correct those market failures, Foulds argues the financial system must engage with governments, policymakers, and global regulatory bodies to reset the rules and align incentives and penalties with sustainable behaviours.

“The shift of the economic system to be agnostic about growth can help accelerate the turnarounds,” says Per Espen Stoknes, Earth4All Project Lead, Norwegian Business School and Member of the Club of Rome, speaking of the five key economic and social turnarounds recommended by the Earth4All initiative.35 “The poorest countries in the world must have economic growth of at least five per cent per year to end extreme poverty in a generation. With the right incentives, this economic growth can be based on a clean energy system and regenerative food system.

With the right incentives, economic growth can be based on a clean energy system and regenerative food system

“In wealthy nations, clean energy transformation will drive economic growth in this sector,” he adds. “How could it not? But this is directed, sustainable growth with a lower material footprint, rather than unhinged, unfettered growth in resource use. This can be achieved with a shift to circular and regenerative economies. At the same time, some industries need to contract: the fossil fuel industry is the obvious one.”

To bring the economy back within planetary boundaries, protect biodiversity and improve wellbeing, markets must be reshaped in pursuit of publicly determined goals. Taking a broad approach, the OECD paper draws up a long list of areas to transform. These include creating new models in finance and macroeconomics; changing governments’ approach to trade and industrial policy; incorporating the unpaid work of raising children or caring for family members into economic accounting. There also needs to be recognition of the “inescapably ethical character of economic analysis” to enable a more sophisticated public debate on the justice of economic policies.36

“What happens depends on the choices we make,” says Ahmed. “If we continue to put up barriers to new technologies, throw money at fossil fuels and engage in conflict, we could accelerate collapse processes. We have brilliant tools that can help solve our problems, but we need to use them in the right way, fast, to get out of the danger zone. That requires big societal choices.”

He explains that, given their cost curves and economic benefits, these technologies will inevitably replace incumbents. However, we must remove the negative feedback loops dampening their progress, namely subsidies for incumbent technologies and fuels, as well as regulatory monopolies.37

How to change the feedback loops

Systems change typically follows an S-curve: early adopters gradually push boundaries, then comes an inflection point when change becomes self-reinforcing and exponential. The financial and economic system is still in the early adoption phase, but when change takes off, the impact could be game-changing.

“Markets are incredibly powerful,” says Tayler. “If you give them the right goal, they can become an enormous accelerator for sustainable action. That is why there is still hope, despite how late we have left it, because we haven’t really gone “all in” on concentrated climate action yet as a society.”

If you give markets the right goal, they can become an enormous accelerator for sustainable action

A powerful way to do this is to use “ambition loops”, whereby governments set clear policies that give businesses the space to innovate and accelerate sustainability practices. When businesses put their financial and intellectual capital at work towards these goals, they often find they can accelerate change and solve problems they didn’t think could be solved. This gives governments scope to become more ambitious, and change begins accelerating in a reinforcing feedback loop.38

“If you then add finance pushing businesses and governments to do more through engagement and advocacy, that gives governments even more reason to provide a better environment to businesses,” explains Tayler.

“In addition, financial markets want to allocate capital to businesses that will succeed in the new policy environment,” he says. “Instead of it just being a feedback loop, there is an even more powerful “triple helix” revolving on and reinforcing itself. That is how macro stewardship can be an accelerant to the positive ambition loop.”

But to achieve those transformations and create powerful new feedback loops, key leverage points must be actioned.

Figure 3: The triple helix of ambition

Government policy

Companies

Finance

  • Clear, ambitious, predictable policy sending long-term signals to support investment in and commitment to transition
  • Responding to the progress of corporates and finance by filling the space with an ever-increasing regulatory bar to reward leaders
  • Public finance utilised to de-risk investment, finance breakthrough innovations and crowd in private investment
  • Ambitious targets and public reporting on progress to meet the opportunity created by the policy environment
  • Delivery against commitments creates space for governments to do more and increase ambition as well as attracting investment from finance, rewarding innovation and ambition
  • Setting clear targets for own activity and investment, lending and underwriting; using stewardship and engagement to encourage ambition and delivery from corporates
  • Engagement with governments to create enabling environment to deliver on own ambition and pushing corporates to meet ever increasing expectations and policy environment
  • Finance mobilisation to leaders and breakthroughs creates more space for public and private sector action and delivery

Source: The Ambition Loop, Aviva Investors, September 2022

Applying maximum leverage

Donella Meadows identified the 12 most effective leverage points in a system.39

When mapping them out, Aviva Investors’ macro-stewardship team first had to translate them into financial terms (stocks and flows of financial rather than physical resources, for example – see Figure 4).

The six areas of maximum leverage are fiscal policy; regulation; market mechanisms; standards and norms; consumer awareness and behaviour; and litigation

“At the Club of Rome Limits to Growth 50th anniversary dinner, we learned they were doing exactly the same thing at the same time,” says Waygood. “It is clearly a useful exercise!”

Through this analysis, the team identified six areas of maximum leverage: fiscal policy; regulation; market mechanisms; standards and norms; consumer awareness and behaviour; and litigation.

“Different people might have more leverage in one particular area or put the fulcrum in a different place to make it more effective,” says Tayler. “But we will need to use all these levers.”

They will overlap and bleed into each other at times, but nevertheless allow for a clearer breakdown of the necessary actions.

Fiscal policy and regulation

From a climate perspective, implementing a significant carbon tax will be essential, so the biggest emitters pay the price for their contribution to global warming and are incentivised to reduce emissions.

“Strong regulation, for example on fuel efficiency, and incentives such as tax breaks on electric vehicles and solar power, have a big role in shaping the behaviour of companies and consumers,” says Earth4All’s Stoknes. “This is possibly the single biggest lever for sweeping change. Simply make the most convenient and cheapest option the most sustainable.

We need governments to become more active in supporting the most innovative companies

“We need governments to become more active in supporting the most innovative companies as part of an overall mission,” he adds. “We can see how these types of incentives reshaped car buying in Norway almost overnight so that electric vehicles dominate the market.”

To reduce inequalities, the OECD paper recommends wealth taxes among a variety of policy approaches currently under discussion in many places. These include “mechanisms to broaden the ownership of companies, reforms to land ownership and housing markets and the design of ‘citizen’s wealth funds’”, as well as measures “to reverse the decline in the effective bargaining power of workers” and to “steer and manage the processes of automation, ensuring that the benefits of higher productivity do not accrue simply to the owners of capital, but also to employees”.40

The paper also explores financial regulation and taxation to penalise high-carbon and rent-seeking financial activity and incentivise long-term investment in productive sectors of the economy. This could “include reforms to the ‘shareholder value’ model of corporate governance and executive pay”, which are among the changes Aviva Investors also advocates.

“As a heavily regulated industry, we understand regulation, so we can and do advocate for legal and regulatory changes that help bring more sustainable practices into place,” says Tayler. “Regulation can create fair competition, but by bringing the bar up for everyone, rather than down.”

It can also help create the ambition triple helix for investors. If the macro-stewardship team communicates with the investment teams on the changes they are advocating for and policymakers’ response, the investment teams can look to position portfolios for clients to benefit from the transition – and to support companies at the forefront of the evolution. In turn, if the investment teams feed back to the macro-stewardship team on the sustainable changes companies want to make but for which they need regulation to level the playing field, that can inform policy advocacy efforts.

“It will be increasingly important for those who are managing money to understand how policy will change,” says Tayler. “Those shifts will transform industries, creating losers but also huge winners. Anticipating them means asset managers can be on the right side of those trends for clients.”

Market mechanisms

This will be helped if market mechanisms are used to internalise externalities, so we finally stop counting the consumption of natural capital as income and begin incorporating the cost of pollution and emissions. The Limits to Growth authors gave the example of water to illustrate the point:

“One of the best ways to put these good practices into action is to stop subsidising water. If water price began to incorporate even partially the full financial, social, and environmental cost of delivering that water, wiser use would become automatic. Both Denver and New York discovered that just metering city water with a charge that rises with rate of use reduced household use by 30 to 40 per cent.”41

As explained in the OECD paper, a combination of policy targets, public procurement, innovation spending and patient public investment can also help steer the economy and encourage private spending.42

I see a big disconnect between the infrastructure needs for the future and investors

“I see a big disconnect between the infrastructure needs for the future and investors,” says Owen Gaffney, Earth4All project lead and communications director at the Stockholm Resilience Centre and Potsdam Institute for Climate Impact Research. “We need to do more work to create missions for massive infrastructure investments that are attractive to long-term institutional investors. Investors often complain there is little to invest in, while offshore wind generation will need to scale rapidly and consistently for the next century and provide ever greater returns on investment.”

Information is essential in using this lever, as illustrated by the increasing scrutiny on companies’ carbon emissions now data is improving. “The fact we can now measure these things means they can properly start to be considered in investment analysis,” says Tayler.

Foulds believes the general push for greater disclosure of sustainability risks and, more recently, principal adverse impacts, particularly in EU regulation, is playing a key role.

“Sustainability risks are predominantly those risks that are already financially material, but principal adverse impacts look at the impact investments will have on the environment and society,” she says. “It is important for financial services to disclose how they are considering both. When policy mechanisms are enacted to finally align penalties and incentives to sustainability, principal adverse impacts will also become financially material.”

Standards and norms

The way we share information will be key to establishing new standards and norms. For instance, to extend planning horizons and base decisions on their long-term costs and benefits rather than short-term profits, Meadows et al wrote of the need to “develop the incentives, the tools, and the procedures required for the media, the market, and elections to report, respect, and be responsible for issues that unfold over decades”.43

The financial services sector should use its influence to push for resilient business models

Gaffney says investor engagement with companies is similarly important. “Obviously, the financial services sector has significant influence in corporate decisions,” he says. “It should use this influence to push for resilient business models based on circularity, regeneration, as well as gender equity and worker empowerment at leadership levels.”

Pushing for industry standards through relevant codes like the UK’s Stewardship Code is also important because, even before they become a regulatory requirement, these norms have a significant impact in shaping behaviours. “When you have labels informing consumers about their choices, you are changing the norms and demand,” says Foulds.

However, Tayler adds investors engaging in macro stewardship must be transparent to demonstrate they are not using their influence for narrow self-interest. Indeed, companies that advertise their environmental or social commitments but then lobby governments against those same goals pose risks to the necessary systems changes.44

Consumer awareness and behaviour

“The legitimacy of what we are doing is important,” says Tayler. “We are doing this for the people whose money we manage. While we can use our expertise to decide what to focus on, we also need feedback on how that aligns with investor preferences.”

In a heavily intermediated system like finance, that means improving the flow of information from customers to advisers and, ultimately, asset managers. This is why Aviva Investors has advocated for stronger EU and UK rules requiring advisers to ask customers about their preferences.

If people care about these things, they should tell their elected representatives what they want

It also means showing people the power they have, by supporting campaigns like Make My Money Matter and using technological tools like Tumelo to help them vote on the shares they own, so they can proactively ask their adviser or pension provider to invest their money in line with their preferences.

“We need to let people know what power they have politically too,” says Tayler. “If they care about these things, they should tell their elected representatives what they want, and make sure they vote.”

The recent election in Australia was one of the first in a G20 country where climate was a key issue in determining the outcome. The more politicians believe climate and social justice issues will determine election results, the more they will act to deliver a just transition.

“Citizens’ assemblies on economic systems change have the potential to bring political tribes together and find a safe space for discussion,” adds Gaffney. “These could help create new alliances around a common agenda.”

Litigation

Concerned citizens are also increasingly acting through litigation, against companies and governments.45

“As macro stewards, we should not rule out using litigation where we think it's the right thing to do. But we also need to understand the environment in which litigation is a material risk for governments and companies,” says Tayler. “We can use that changing environment to put pressure on them, in the knowledge that if they don’t reform, citizens, customers and NGOs will use the legal system to obtain those changes. It is another tool to change the system.”

Embracing the possible

Systems change is difficult by definition, requiring us to rewire what are often deeply ingrained ways of thinking and processes and to fight against powerful vested interests. It would be easy to fall into passive acceptance of the status quo.

It is going to be an exciting space to work in, as we need to think about power shifts

Such acceptance is not only dangerous; it also ignores the huge potential upside of reshaping outdated conventions.

As Nafeez Ahmed puts it: “We are looking at a world that is more networked and decentralised, where many of the old, centralised structures are going to become obsolete quite quickly. It is going to be an exciting space to work in, as we need to think about power shifts. We already have technologies to leverage to make an amazing world and solve our deepest challenges. They also happen to be the technologies where the biggest opportunities for value creation can be found.”

Figure 4: Leverage points – from least to most effective

12. Constants, parameters, numbers

  • Size of the financial system / global economy and rate of consumption
  • Scale of regenerative ability of the planet
  • As the planetary boundaries work of Johan Rockstrom and the Stockholm Resilience centre shows, we can (and should) change rates of consumption and enhance the regenerative ability of the planet through reforestation, giving space for regeneration, rewetting peat bogs, and so on. But more substantial intervention is needed46

11. Size of buffers relative to their flows

  • This is about maintaining key stabilising forces (e.g., ice sheets, rainforests, ocean currents, etc.) and looking at the financial system – i.e., the capital buffers and scale of flows in the system

10. Structure of stocks and flows

  • The way money flows around the financial system (the plumbing)
  • Structure and mandates of the international financial architecture (see Figure 2 above)

9. Lengths of delays relative to the rate of system change

  • Short-termism is pervasive. Our ‘just-in-time’ approach to change means there are sometimes delays between regulatory interventions and their effects becoming visible. However, valuations often react quickly to signals from policymakers and regulators, so are much more volatile

8. Negative (correcting) feedback loops

  • Ratings, rankings, benchmarks (examples: WBA, CHRB, SSE, PRI, CDP)
  • Conventional ratings and rankings are often backward-looking and do not sufficiently incorporate issues of sustainability and impact. Use of metrics that incorporate sustainability and impact, as well as forward-looking efforts from companies, must become more widespread

7. Gains around positive (reinforcing) feedback loops

  • E.g., momentum on sustainability
  • Overall momentum on sustainability is building but insufficient to overcome pre-existing incentives and priorities, especially under stress

6. Structure of information flows

  • SFDR, TCFD, traditional financial reporting
  • Information on sustainability and disclosure is increasing, but too slowly, with too much focus on disclosure as an end in itself. Reporting initiatives such as TCFD and SFDR are important, but not as important as the actions being taken by companies to improve their sustainability
  • There is too little information consistency – e.g., net-zero commitments not translating into company accounts and projections in financial reporting

5. Rules of the system

  • Rules that govern the financial system
  • This is a key leverage point – not just the rules on disclosure, but the rules that govern the system itself, for example the extent to which transition plans, net-zero commitments etc. become mandated, and the extent to which the bodies of the international financial architecture embed responsibility for monitoring and overseeing the delivery of net zero
  • How can markets be harnessed for a smooth, orderly and just transition to net zero?

4. The power to self-evolve

  • This is hugely powerful – and underexploited. Participants in the financial system should advocate for its reform to make sure it has a long-term (sustainable) future

3. Goals of the system

  • Profit maximisation or profit optimisation? Extractive and exploitative or regenerative?
  • How to bring the economy back within planetary boundaries?

2. Mindset or paradigm

  • What is the system for? Do we serve the system, or does it serve us?
  • This is critical: we need mindset shifts to make all the other interventions work. Otherwise, the power of the paradigm makes the system hugely resistant to change and interventions will be insufficient to shift the course

1. Transcend paradigms

  • The power to see the paradigm itself, to be able to understand and change it
  • Global growth at all costs inexorably leads to civilisational collapse

Source: Aviva Investors, Donella Meadows, September 202247

References

  1. Donella Meadows, et al., ‘The limits to growth’, Potomac Associates, 1972
  2. ‘Strategies to change the financial system: An interview with Natalie Mangondo’, Aviva Investors, August 16, 2022
  3. Donella Meadows, et al., ‘Limits to growth: The 30-year update’, Chelsea Green, 2004
  4. ‘Sixth assessment report’, IPCC, 2021 and 2022
  5. Earth overshoot day
  6. Shunsuke Managi and Pushpam Kumar, ‘Inclusive wealth report 2018: Measuring progress towards sustainability’, Routledge, 2018
  7. Herman E. Daly, ‘Beyond growth’, Beacon Press, 1996
  8. ‘Go long: The case for investing in long-termism’, Volans and Climate-KIC, February 2022
  9. Mark Versey, ‘Redefining stewardship: Why stakeholder capitalism needs to wake up’, Aviva Investors, August 31, 2022
  10. Donella Meadows, et al., ‘Limits to growth: The 30-year update’, Chelsea Green, 2004
  11. Jørgen Stig Nørgård, et al., ‘The History of The Limits to Growth’, The Solutions Journal, March 2010
  12. Donella Meadows, et al., ‘Limits to growth: The 30-year update’, Chelsea Green, 2004
  13. ‘Know your limits: An interview with Nafeez Ahmed’, Aviva Investors, August 29, 2022
  14. Kate Raworth, ‘Doughnut economics: Seven ways to think like a 21st-century economist’, Random House Business, February 2018
  15. David Peter Stroth, ‘Systems thinking for social change: A practical guide to solving complex problems, avoiding unintended consequences, and achieving lasting results’, Chelsea Green, 2015
  16. Kate Raworth, ‘Doughnut economics: Seven ways to think like a 21st-century economist’, Random House Business, February 2018
  17. Rafael Laurenti, ‘The karma of products: exploring the causality of environmental pressure with causal loop diagram and environmental footprint’, May 2016
  18. Donella Meadows, et al., ‘Limits to growth: The 30-year update’, Chelsea Green, 2004
  19. David Peter Stroth, ‘Systems thinking for social change: A practical guide to solving complex problems, avoiding unintended consequences, and achieving lasting results’, Chelsea Green, 2015
  20. Michael Jacobs, et al., ‘Beyond growth: Towards a new economic approach’, OECD, September 11, 2020
  21. David Peter Stroth, ‘Systems thinking for social change: A practical guide to solving complex problems, avoiding unintended consequences, and achieving lasting results’, Chelsea Green, 2015
  22. Michael Jacobs, et al., ‘Beyond growth: Towards a new economic approach’, OECD, September 11, 2020
  23. David Peter Stroth, ‘Systems thinking for social change: A practical guide to solving complex problems, avoiding unintended consequences, and achieving lasting results’, Chelsea Green, 2015
  24. Herman E. Daly, ‘Beyond growth’, Beacon Press, 1996
  25. Herman E. Daly, ‘Beyond growth’, Beacon Press, 1996
  26. Steve Waygood, ‘A tragedy of perception: Fixing the ESG blind spots in business, finance and economics’, Aviva Investors, September 8, 2022
  27. Donella Meadows, et al., ‘Limits to growth: The 30-year update’, Chelsea Green, 2004
  28. ‘Go long: The case for investing in long-termism’, Volans and Climate-KIC, February 2022
  29. Steve Waygood, ‘A tragedy of perception: Fixing the ESG blind spots in business, finance and economics’, Aviva Investors, September 8, 2022
  30. Earth4All is as a vibrant collective of leading economic thinkers, scientists, and advocates, convened by The Club of Rome, the Potsdam Institute for Climate Impact Research, the Stockholm Resilience Centre and the Norwegian Business School
  31. Michael Jacobs, et al., ‘Beyond growth: Towards a new economic approach’, OECD, September 11, 2020
  32. Kate Raworth, ‘Doughnut economics: Seven ways to think like a 21st-century economist’, Random House Business, February 2018
  33. Michael Jacobs, et al., ‘Beyond growth: Towards a new economic approach’, OECD, September 11, 2020
  34. Steve Waygood, ‘Harnessing the international financial architecture to deliver a smooth and just transition’, Aviva Investors, April 22, 2021
  35. ‘Upgrading the economic system’, Earth4All, September 2022
  36. Michael Jacobs, et al., ‘Beyond growth: Towards a new economic approach’, OECD, September 11, 2020
  37. ‘Know your limits: An interview with Nafeez Ahmed’, Aviva Investors, August 29, 2022
  38. See The Ambition Loop
  39. Donella Meadows, ‘Leverage points: Places to intervene in a system’, The Donella Meadows Project, as of August 18, 2022
  40. Michael Jacobs, et al., ‘Beyond growth: Towards a new economic approach’, OECD, September 11, 2020
  41. Donella Meadows, et al., ‘Limits to growth: The 30-year update’, Chelsea Green, 2004
  42. Michael Jacobs, et al., ‘Beyond growth: Towards a new economic approach’, OECD, September 11, 2020
  43. Donella Meadows, et al., ‘Limits to growth: The 30-year update’, Chelsea Green, 2004
  44. Sarah Murray, ‘Investors grapple with complexities of biodiversity’, Financial Times, July 18, 2022
  45. AIQ Editorial Team, Law and climate: Using the legal stick to accelerate change’, Aviva Investors, October 15, 2021
  46. ‘Planetary boundaries’, Stockholm Resilience Centre, Stockholm University, as of September 2022
  47. Donella Meadows, ‘Leverage points: Places to intervene in a system’, The Donella Meadows Project, as of August 18, 2022

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