Driving systemic change within the finance sector: an educator’s perspective
23 February 2023 - Drawing on his experience delivering executive education programmes to leaders in the finance sector, CISL Programme Director Thomas Vergunst considers perceptions of the need for systemic transformation - the extent of the change required, mechanisms for progress and the role of business in delivering transformative change.
To change or not to change
Take a moment to consider the following question: Do you think our current economic system will be able to deliver the necessary social, environmental and economic outcomes that society needs?
- Yes, our current system works well
- Yes, but it will require minor adjustments
- Yes, but it will require deep systemic change
- No, we need a new economic system
We could, of course, have a long and interesting debate about the difference between what constitutes ‘deep systemic change’ versus ‘a new economic system’. The distinction is blurred. This and the sheer number of economic systems in operation around the world makes it more of a qualitative question aimed at eliciting a sense of the extent of change or transformation that we think is required. So, with that in mind, where do you stand?
Since the onset of Covid-19, I’ve been posing this question to hundreds of individuals working in banking, investment and insurance across Europe and Asia. Admittedly, it has not been a representative sample as respondents were participants in one of CISL’s customised executive education programmes. They were also asked this question after they had been exposed to leading thinkers and scientists who had set out some of the latest evidence around the scope and scale of social, environmental and economic challenges that we are facing. The responses were nevertheless revealing and suggest that financial institutions need to be a lot more thoughtful about their role in society and what they can do to bring about positive systemic change.
Of the 989 people that have responded to this question, the vast majority (95 per cent) felt that we either need a deep systemic change or an outright new economic system. These individuals, many of whom are in very senior leadership positions, also felt that the role of business in society fundamentally needs to change (i.e. businesses in both the real economy and the finance sector that underpins it). You can see a full breakdown of responses in the charts below. It is clear that respondents felt that we need something closer to full systems transformation rather than simply trying to be ‘a little less bad’ with each passing year. Acknowledging this need for transformative change early on in a learning journey opens up a space for an honest exploration of the mindsets, actions and strategic commitments that are needed if financial institutions are to be part of the solution, rather than passively watching from the side-lines as others respond.
Do you think our current economic system will be able to deliver the necessary social, environmental and economic outcomes that society needs? (based on 989 responses)
Do you think the role of business in society needs to change? If so, what extent of change – on a scale of 1 to 10 – do you think is required? (based on 836 responses)
Changing mindsets
As part of our education programmes we explore how individuals and organisations can respond and the idea of double materiality plays an important role in this. Single materiality considers the financial impact of the world on a business, whereas a strong conception of double materiality is concerned with how a business impacts the world. The finance sector’s focus on environmental, social and governance (ESG) is still largely viewed, and practised, through a single materiality lens – that is, as a set of input factors used to assess the financial risks and opportunities faced by companies in their respective markets. Double materiality requires us to go much further and think beyond an organisation’s narrow short-term financial interests to its broader role within society and its longer-term resilience on a finite planet. It is more focused on the social and environmental outcomes – both positive and negative – that result from corporate activities. While these may not have immediate financial implications, they will likely become financially material over time (e.g. Alex Edmans, Professor of Finance at London Business School, notes that, “In the long run almost all value becomes financial value”).
Positively influencing economic and corporate systems will require business leaders to adopt a double materiality mindset and actively demonstrate a strategic commitment to this. Such a mindset is fundamentally different to what many business leaders have grown up with and built their careers on. With the European Union now encoding double materiality into corporate sustainability reporting requirements there may be little choice but to shift perspectives and take a wider view of the role of business in society.
Taking action
Driving positive change in practice is complex and messy. This is particularly true as we go through a contested period where the role of business in society is being scrutinised on multiple fronts (frequently for very good reasons, such as, failed commitments, obfuscating climate science and actively lobbying against policies to protect people, nature and climate). Our education programmes with financial institutions aim to help senior leaders navigate this complexity by helping them understand why there is an urgent need for change, what ‘good’ might look like in terms of driving transformational change both inside and outside their originations, and how this can be articulated and implemented as part of a coherent strategy that connects to an organisation’s core purpose.
It is clear that we urgently need significant investments to protect us from the worst impacts of climate change and to support us in delivering the 17 Sustainable Development Goals (SDGs) by 2030. By some estimates we need annual investments of over a trillion USD this decade to limit global warming to 1.5oC above pre-industrial levels and somewhere in the order of hundreds of billions to trillions of USD per annum to achieve each one of the SDGs. This is going to require a significant and sustained effort from the financial community.
While education can help to shift the hearts and minds of senior leadership teams and support the development of new capabilities, it is insufficient without broader structural and cultural changes to align an organisation’s incentives, governance and strategy making processes. There are thankfully a growing number of approaches, frameworks and tools that can help corporates and financial institutions gain insights into what ‘good’ might look like. Summarised here are a few practical examples that have been grouped under what CISL sees as being four key areas for action.
Leading change in a world where the future will be very different to the past is going to require new knowledge, skills and attitudes/values. We need to focus on transforming them all and bringing an impact focused lens to everything we do.