Written by Caroline Ashley, Forum's Global Programmes Director, this blog draws on conversations with actors in and beyond finance, and on this new Forum paper on the Role of Finance in systems change.

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The financial institutions that navigate the upcoming transitions will need to lead from the top, embedding systems-level thinking into their culture. They will actively step up to contribute to an economic transition to a decarbonised, just and thriving society, and through that will be shaping and leveraging the role of finance as an agent of change. 

As we have argued in the preceding posts in this series, enabling a sustainable future is not a question simply of which enterprise is financed or insured.  Systems-level thinking requires looking beyond the underlying enterprise and asset level, and exploring questions of what a sustainable economic system might look like and the role of distinct financial industries and institutions within that - and then revisiting which enterprises might be financed or insured, through that wider lens.

Rather than championing current forms of capitalism as the solution, leaders will actively engage with and acknowledge the failings of the current approach to endless growth. Their institutions will invest time and resources in working with academics, economists, non-profits, those testing alternatives at local levels, and sustainability-driven financial institutions to explore alternative economic and business models and what this might mean for the future of finance. 

Leadership is about what you do, how you do it, and the mindset that you bring to it. We highlight 5 priorities for leaders to  drive new practice forward while also driving cultural shifts within their organisation and sector.

Leading practice at the edge

Actively reshape the economy for decarbonisation that delivers to ecological thresholds

Strong leaders will maximise what they can do to drive real economy decarbonisation with firm time-bound commitments to phasing out fossil fuels by sector. Rather than just transferring assets that offload the responsibility, the approach will be guided by the impact (or ‘delta’) of financing activities, such as a decrease in the carbon emissions of the underlying financed asset.  Whether change is sufficient  will be judged by whether it delivers within thresholds (such as Science Based Targets) not whether it is better than what happened before.

Creativity, risk-taking and partnership will be needed.  We need leaders to go beyond what they are certain and confident of, to push boundaries. At the same time, risks of greenwashing or double-counting carbon reductions abound, so this will require far more transparency on what is in underlying portfolios, requiring improved data quality throughout the investment chain and supporting infrastructure. 

Fully integrate social justice into the transition

For this to be a transition to enable a future that is resilient and supports thriving societies, finance actors must place an emphasis on incorporating social justice in the change that they promote and influence. At a minimum, this means comprehensively integrating the UN Guiding Principles on Business and Human rights into due diligence across the investment chain. But success is not just about delivering well to current standards, but widening voices (see solutions space below) that will continue to innovate and drive improvement. 

Driving Cultural and Organisational Shifts

These leadership roles will require shifts in mindsets and ways of working. In particular: 

Shape mindsets: finance as a driver of positive systemic change

The most powerful shift that leaders will take is to mainstream the mindset shifts that are today emerging at the margin.   

This is, firstly, to debunk any idea that finance is neutral and recognise that finance can be and must be a powerful enabler of deep change for a quite different economy that can sustain people and planet long-term. 

The second big shift is to adopt  ‘system-level investing’, which puts the health of the wider economic system as a central frame of analysis and action. 

This a wider but totally necessary and logical extension of the fiduciary duties of finance to protect long-term interest of clients.  It  will require system-thinking skills (which are explored further in our next post, coming on 7 December).

Challenge the rules of the game

System-change players recognise that the current rules of the game are not fixed, not inevitable. They are human constructs. They can be challenged and changed.   Leaders in finance will  - in partnership with others - change incentives in their firms, shift fundamentals that are taught in university, and, as we explored in our second post, will  call on international and national policy-makers to change the regulations and requirements that provide the ‘rules of the game’. 

Widen the solution space

Change cannot be made by financial actors alone, but needs collaboration with other system actors. 

To put us on a pathway to a just and regenerative future we will need creativity and different perspectives that will only be found outside finance, because there needs to be alternative visions of what is possible and desirable. Leaders should invest time and resources in working with academics, economists, non-profits, those testing alternatives at local and regional levels to widen the solution space.  Inter-disciplinary expertise will be needed to diagnose how systems are working and how to change them. 

This inclusive co-creation approach would also acknowledge the impact of the huge concentration of capital in a handful of international financial centres, and gross inequity in global capital flows. Less than 4% of global wealth flows to lower- and upper-middle-income countries (excluding China), yet they comprise 50% of the world’s countries. 

This requires these initiatives to proactively invite and collaborate with ‘knowledge bearers from social, cultural and political worldviews different from their own’, to quote Gillian Marcelle, as what comes next ‘cannot be about extending an unsustainable financial infrastructure, moulded by a handful of countries, to the rest of the world.’ 

Collaborations currently dominated by the private sector, such as the UN Global Investors for Sustainable Development Alliance, the Coalition for Inclusive Capitalism, or the US-only Business Roundtable, will need to expand their reach and commitment to action. Those financial institutions with an active leadership role in these groups must include at the table thinkers from outside high-income countries, across the political, scientific and civil society sectors, if they are to avoid being ‘insider’ talking shops. 

Conclusion

In this increasingly chaotic decade, leaders are needed in finance who will harness the power of finance to shape a different economy.   There is no playbook.   But we believe that these leaders will adopt a systemic mindset and a frame that focuses on the health of the whole system, while expanding collaboration and welcoming diverse and interdisciplinary perspectives.    

For this we need a systems lens and systems changing skills, which are explored further in our final post of this series on 7 December, from Forum’s Charlene Collison, and Laura Winn from the School of System Change.

Ideas shared in this blog series draw on a new Forum paper on the role of finance as an agent of system change. 

School of Systems Change in Finance: This is an initiative of the School of Systems Change, Forum for the Future, and Aviva Investors, to develop system-change skills and perspectives amongst players within the finance sector.  It draws on deep systems change skills in the School, perspectives on systems change in finance captured in Forum’s paper (above), and reflected by Aviva in this edition of Aviva Investors Quarterly. 

This is one part of a series of blogs on how the finance sector can step up as an agent of change. See also:
1. From ESG to systems change in Finance
2. Three innovations demonstrating finance as a lever for system change
3. What does good leadership look like for financiers embracing a role in driving change?