This podcast is supported by the article below.
It’s encouraging to hear about progress being made by financial institutions on their attempts to resolve the environmental crisis, however, there is still too little being done about the most critical piece of this complex puzzle, addressing short-termism.
It’s easy to argue that short-termism is a wider societal behaviour, not just the financial sector’s problem. Society’s infatuation with short-term gratification at the expense of long-term interest is deep seated and has been further exacerbated by the emergence of a global pandemic and regional issues such as the cost of living crisis in Europe. Breaking society’s fixation on consumerism will be a monumental transition that needs a huge, concerted effort and which cannot happen without shifting to longer term horizon planning and diverting vast amounts of capital.
The financial system holds the key to this change and their inaction will have a catastrophic impact. Weather related impact alone on property, migration, political stability, and food/water security will impose huge costs on future generations. To summarise Mark Carney in his 'Breaking the tragedy of the horizon' speech, these costs will reach far beyond political, business, and technocratic cycles and become a defining issue for long term financial security, by which time it may be too late to change.
Without a long-term vision and plan for change, companies will continue to deliver non-sustainable products and services and society will continue to consume, thereby perpetuating the tragedy of the commons.
It’s a matter of culture overhaul
Whilst the financial system is ‘pledging’ to scale back direct investment in non-sustainable activities, there continues to be heavy investment into, and in some cases, indirect financing of, companies who are actively investing in non-sustainable activities (as seen with The Big Shift Report on the World Bank Group). This behaviour feeds the deeply entrenched need for short-term profit and encourages firms to find loopholes around delivering sustainability in the face of political, scientific, and real-world events to the detriment of society and the environment.
This behavioural shift requires a radical cultural redesign within the financial system. The question is, can the financial industry be brave enough to take the first step towards this seismic change if the rest of society, including investors, are lagging behind? Is the financial sector willing to relinquish its short-term profit chasing habits and does it have the forward looking, innovative and creative ability to incorporate longer-term, sustainable strategies into financial planning and capital investment decisions?
A conduct culture rethink isn’t a new concept for the financial system to digest. As Peter Andrews from the Financial Conduct Authority (FCA) observed in his 2016 speech, poor culture in UK banking played a significant part in the 2008 financial crisis and was the root cause of many failings at firms. Regulators enforced an overhaul and system-wide improvement across conduct frameworks to drive the cultural changes needed to address the gaps, as seen with the design of the FCA’s Senior Managers and Certification Regime.
The hurdles are large
Short-term performance pressure for investors and intermediaries, who focus on quarterly financial earnings and short investment time horizons, will always be the most challenging hurdle to overcome. Longer-term positive environmental and social impact is also compromised by the misalignment of fiduciary duties of financial intermediaries to the long-term interests of certain investors. Why spend time and money providing a long-term view in a research report to reflect on longer-term embedded value when it is contrary to an investors’ preference on near-term earnings?
Global regulators and organisations are taking steps to help firms shift their cultural focus and shepherd the industry away from short-termism, however, firms are generally hesitant to change beyond what is absolutely required, which is likely compounded by a fragmented global regulatory approach creating a complex myriad of risk frameworks for financial firms to navigate, especially where standards, taxonomies and eligibility thresholds differ. It is difficult to plan a long journey if there are multiple maps to read and voices giving you different directions.
Encouragingly, the International Sustainability Standards Board have recognised this disharmony and are working on a global baseline of sustainability reporting standards. This month, the FCA published a discussion paper that aims to incorporate Environmental Social and Governance (ESG) linked remuneration, incentives, accountability and competencies and encourage active investor stewardship to hold companies to account. The paper also recognises that long-term sustainability commitments may extend beyond the tenure of incumbent executives, which is especially relevant where a CEO’s average length of tenure, as observed in Andrew Haldane’s 2010 Oxford China Business Forum speech, was estimated in 2009 to be as low as only 6 years.
To embed new ways of long-term sustainability thinking into the financial system’s operational practices and decision-making, it is imperative that an organisation’s culture and competencies provide all staff with the environment, skills and tools to achieve this. Cultural change requires a systemic re-education. Whilst some firms are creating ESG training bespoke to their sustainability goals and individual teams, industry training needs to go much deeper with greater collaboration to encompass a systems thinking and coordinated approach.
Conversations with leading recruiters seems to imply that firms are relying on existing staff to absorb ESG responsibilities without providing them with the necessary training and support. Appointing qualified specialists such as Sustainability Officers and dedicated ESG staff is, therefore, a necessary first step to inject the required expertise and accelerate the critical changes needed and help to avoid “competence washing”. Empowering all staff to incorporate social and environmental value into their day-to-day roles and decision making requires a far more comprehensive, bespoke and meaningful ESG training programme across an interconnected global industry.
Be ahead of the pack
Greater emphasis on longer-term strategy integration alongside short-term views creates financial resilience and enables firms to react and adapt their strategic planning to impending and immediate social and environmental threats e.g. Covid, racial justice protests etc. These financial firms will also appeal to an ever-growing population of sustainably focussed companies, consumers, shareholders and investors who are looking to make better informed and more stable investment opportunities.
The financial system needs to be far bolder and braver than ever before to make the cultural change needed to shift away from a wider behavioural problem. There will inevitably be unpredictable and very large holes in the road ahead but equally, opportunities will be presented that will benefit those positioned to reap the rewards. Most importantly, these rewards will create better outcomes for the environment and society.
Get in touch with Zoe at Leaman Crellin to discuss how we can help you think and plan for the longer term
