There is a growing understanding that, in order to tackle the current sustainability crises, the financial sector needs to be in line with broader social goals. The financial sector clearly has a major role to play in the global transition to net-zero greenhouse gas emissions yet, despite some progress, substantial barriers remain. The current ways of working of the finance industry are proving an obstacle to the transformational change required to combat climate change. Thorny questions still require answers about the purpose of the investment system and the changes required to achieve the redirection of capital that the climate crisis urgently requires.
There is a growing understanding that, in order to tackle the current sustainability crises, the financial sector needs to be in line with broader social goals. The financial sector clearly has a major role to play in the global transition to net-zero greenhouse gas emissions yet, despite some progress, substantial barriers remain. The current ways of working of the finance industry are proving an obstacle to the transformational change required to combat climate change. Thorny questions still require answers about the purpose of the investment system and the changes required to achieve the redirection of capital that the climate crisis urgently requires.
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Invested In Value Creation
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More needs to be done to find ways to empower the consumer's voice and rely less on flawed assumptions that focus purely on financial return. Making financial education more accessible can allow more people to understand the range of financial products available and enable them to apply their values to their investment decisions. The current measures of success across the financial system often incentivise short-term financial returns over long-term sustainable value creation.
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Rethinking what good performance truly means could help to better establish incentives that drive the right behaviour. In the current system, there is a strong focus on the continuous demonstration of growth and profitability. Yet to support the scaling-up of the new industries and business models that can deliver a sustainable economy, investors are needed who have no expectation of turning a quick profit. Investors who are willing to substantially increase their time-horizons for seeing impact, like those at British Patient Capital, could help to finance the changes needed to tackle the climate emergency.
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Integrating environmental considerations into benchmarking strategies can improve long-term thinking. If framings of risk and return are too narrow, they can prevent sustainable principles from being fully reflected in investment decisions. Risk measurement determines the asset allocation strategy, the objectives of the investment mandate and the freedom that fund managers have.
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Stringently siloed accounting frameworks can also prevent participants in the financial value chain really understanding the impact of capital flows. Without broader accounting metrics –which include a full understanding of different types of capital, for example, human, natural and social – actors lack the information they need to inform their decisions on important issues and support long-term value creation. Promisingly, there are some accounting reforms underway. For example, the IFRS Foundation, the body that oversees the work of the International Accounting Standards Board, is designing a new board for setting sustainability reporting standards.
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Timely Technological Transformation & Transparency
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Technology development offers opportunities to disrupt the investment industry and reconnect end beneficiaries with the impact of their investments. Investment platforms that cut out a lot of the middlemen, for example, reduce the fee-driven incentives that contribute to conflicts of interest within the investment chain. Organisation such as OpenInvest allow people to hand-pick equity portfolios that meet their return objectives while screening against environmental, social and governance indicators.
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Technology can also help in delivering greater clarity and empowering consumers to engage more with their funds. Automated management and advice platforms, such as FutureAdvisor, can give consumers access to information on emerging trends and data-based recommendations for their own investment goals.
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More non-financial data should help in overcoming risk-avoiding behaviours and evaluating real impact too. A challenge for many investors, both retail and institutional, is a lack of data and disclosure by companies. To meet the rising demand in the market and channel significant capital towards more sustainable options, data on real-world impacts should be a fundamental decision-making element rather than an optional add-on.
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Incentivising innovation and creating space for experimentation with more radical, yet sustainable and long-term, investment decisions could speed up system change. Innovative accounting frameworks could enable all participants in the value chain to really understand how capital is being used. There is a role for regulation too. Regulators, together with policymakers, have the capacity to create a regulatory environment that supports experimental financial approaches, provides a clearer direction in line with sustainability goals and fosters shared beliefs about our common future.
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Actionable Artistic Activism
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Art and technology have a complex but meaningful history of working together and influencing one another. In many ways, they have evolved alongside each other to arrive at their place in the world today; a digital age where they constantly overlap and portray new ideas.
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With every new evolution in technology, art changes too. However, this doesn't just apply to their production. The way art is viewed, shared, consumed and subsequently sold is constantly transforming too. Technology has made art far more accessible. Just like with countless other aspects of modern life, the internet has allowed art to be consumed in a more direct way, opening the industry to a wider and more diverse audience.
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In today’s world, this is simultaneously transforming the financial system - including developments in greater access to financial resources, education, investment opportunities, earning potential, creativity and social capital impact. Blockchain technology has multiple purposes for the art world, and has the potential to make an even more significant impact. In a 2014 report, The Fine Arts Expert Institute (FAEI) found that over 50% of the artworks it had examined were either forged or not attributed to the correct artist. The rise of blockchain can help change this and maintain the all-important authenticity in more industries than one.
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Blockchain technology is currently being used to edition and sell digital art via digital art marketplaces, however these platforms aren’t yet mainstream. To access them, one needs to understand how to use a digital wallet and cryptocurrency. Once these selling platforms start accepting Fiat currency, it could further democratise access.
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There is an opportunity here to educate people on how to buy digital art, how to access a blockchain, and how to think about digital scarcity. Secondly, there are opportunities to use blockchain platforms to simplify the trading of physical artwork, and create industry-wide title registries. To move forward with this solution, however, the industry must decide how to connect the physical works to a blockchain registry, and there are a number of companies creating solutions currently.
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The real success in utilising blockchain will arise when trusted industry leaders and experts reach a consensus on the platforms we should utilise. Blockchain provides the opportunity for competitors to share data while maintaining institutional and personal privacy, which would simplify our people’s lives dramatically. To get there, however, the first step is to agree upon an industry provider, or providers with interoperable platforms.
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Two of the most interesting and current areas of decentralised finance are DAOs and NFTs. DAOs are Decentralised Autonomous Organisations - these are member owned communities without centralised leadership that work collaboratively towards common goals. It acts as a safe way to co-create with strangers, as well as committing funds to a specific cause transparently.
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Think of them like an internet-native business that's collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organisation has a voice. Everything is out in the open and the rules around spending are baked into the DAO via its code.
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Starting an organisation with someone that involves funding and money requires a lot of trust in the people you're working with. But it’s hard to trust someone you’ve only ever interacted with on the internet. With DAOs you don’t need to trust anyone else in the group, just the DAO’s code, which is 100% transparent and verifiable by anyone. This opens up so many new opportunities for global collaboration and coordination.
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When it comes to NFTs, the most interesting element is in uncovering more about how we ascribe value to the intangible - whether that be service, brand, image, emotion or story. If blockchain’s value in terms authentication and value preservation appears indubitable, the commodity-driven approach it has brought to the forth remains problematic in terms of the issue of the art-world turning into an increasingly tech- and asset-driven field. We cannot risk the cultural value of art becoming completely lost. When you buy an artwork, you’re not just clicking to buy the piece, you’re falling in love with it. This is a different kind of transaction based on relationships.
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Ultimately, a proper discussion about value is needed and on the investment system's goals. Only by challenging this, can it become possible to enlarge the current definition of ‘returns’ to incorporate the essential non-financial factors that will enable a sustainable future for the whole society.
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With so much potential for transforming the sector and embedding sustainable practices, diversity and inclusion are needed in the sector to bring a wide range of views and to integrate principles of equity and justice in the future. A constellation of people, policymakers and businesses from both within and outside the finance sector can create a diversified environment where fairer decisions and collaboration may take place.
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2021 is the time to accelerate the journey towards a financial system that supports and enables a net-zero economy. Rethinking what prosperity means in a world of environmental, social and economic limits is an urgent task. Without redefining the purpose of finance and rebalancing finance with broader values, it will not be possible to shift the financial system towards one that delivers financial security in a world worth living in.
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