The decisions our business leaders make now are key to NZ’s long-term prosperity.

Matt Whineray, Chief Executive Officer, NZ Super Fund

Change is a bit like a ‘who dunnit’ murder-mystery where there must always be means, motive and opportunity.

This is quite a useful construct when thinking about transforming a financial system to a sustainable model. How do you change things? Well, you need means – which in this case is information, data and frameworks to help inform decisions. For example, reporting on climate-related financial risk is necessary, but alone it is not sufficient unless people have a reason to incorporate it into decision-making.

If you price natural capital or emissions properly, people will incorporate that information into their decisions. That’s undoubtably right in a theoretical sense, and it would be great if we had a system that properly charged people for the negative impacts of their activities on the environment and society. But until we get that, why would people need to do this? What is the motive?

Motive might be the recognition that climate change presents risk to your business, today, or that a long-term perspective is needed on today’s financial decisions to incorporate long term impacts, or that you will start to be charged properly for carbon emissions. It can also relate to how companies, investors and asset-owners describe their purpose in terms of social outcomes –not just a pure profit motive.  For example, your motives might be reflected in your KPIs around environmental or social outcomes. It might be the law requiring you to take climate change risks into account in governing a business.

So, you have means and motive – the opportunity arises every time someone makes a decision.

First, though, how to think of the financial “system”? When I think of a system, I think of a set of pipes or a set of cables, directing water or electricity. It feels quite engineering focused. But our financial system is not this, it is a whole set of individuals making decisions; the ‘system’ is the aggregate of everybody’s decisions.

Participants in the financial system are making decisions every day about whether to lend money, to invest in a company, to undertake R&D or to pursue a new project. They decide whether to consume or save. They make short-term and long-term decisions.

The challenge for us, as Partners of The Aotearoa Circle, is to ensure that these many individual decisions are made not just with short term financial success in mind, but with New Zealand’s long-term interests at heart.  Business is key to advancing the wellbeing of our people, the prosperity of our communities, and New Zealand’s transition to a low-emissions economy.

A concept that keeps coming up, as we discuss sustainable finance, is the Western economic concept of externalities; the idea that the consequences of a decision are somebody else’s problem. The consequences of a decision might be the next generation’s problem in the case of climate change, or they might be some other group’s problem in the case of inequality, or even at a local level it might just be your neighbour’s problem in the situation of environmental degradation where you’re taking too much water or polluting.

To have an externality, you have to have some boundary – geographical, or across groups of people, or even a time boundary.

That’s why Mark Carney’s phrase “the tragedy of the horizon” encapsulates the issue with climate change so perfectly. In the case of climate change, we have an intergenerational tragedy where the current generation is causing problems for the future generation, where today’s decision-makers don’t have any direct incentive to solve climate change other than their relationships with those future generations.

Externality is an important concept, and figuring out how to internalise these externalities is fundamental to solving some of the world’s biggest problems; how do you get people to consider the longer-term impacts of those decisions, and the impacts on others or the environment, when they’re making them?

Economists will tell you transformational change has to be driven by pricing signals and property rights. In a purist sense, they are probably right. But the real world is messy, and that’s also the most difficult from a geo-political perspective because you would need everybody holding hands and pricing carbon together. While we are edging towards that, but in a situation where countries incentives to put a proper price on carbon are different, we can’t wait forever for the economist’s perfect model to materialise, and people making decisions today need to be able to anticipate the potential changes tomorrow.

So how do you encourage people to make decisions on a longer-term basis and consider the impact on future generations and on their neighbours?

And what do people need to make different decisions? You need information on what those long-term impacts are and data on the consequences about environmental degradation, use of water, climate change or carbon emissions.

Researchers recently used AI to analyse earnings call transcripts over the last five years for companies on the S&P 500, the Eurostoxx 600 and the ASX 200.

The research found that 72 per cent of the ASX constituents were talking about ESG topics in the latest period, and that had grown quite a lot. Half the time it was the Chief Executive talking on ESG topics.

The words used most frequently in the Australian calls were water, recycle, carbon, environmental and emissions.

Companies are increasingly talking about this stuff with investors and analysts. There is still a difference between qualitative discussion and quantitative reporting, but it’s certainly moving towards more qualitative discussion.

When we did the first carbon footprint of the NZ Super Fund’s investments we couldn’t measure the whole portfolio because some assets were hard to get data on. But every year we do it, the data improves, and our reporting improves with it.

Another example of more information being available is the growing disclosure by corporates of their climate-related financial risk. In the past this has been problematic for institutional investors as the data has not been rock-solid. But the quality of data is improving. 

The recent government announcement around the requirement to report climate risk is helpful and it is good to see that people are already doing it in advance of it becoming law. We may find that by 2023, when it’s actually required, most people are already doing it which would be a great outcome.

There is a competition globally for capital. Investors are looking for opportunities that are consistent with their sustainability mandates and the expectations of their customers and beneficiaries. For example, the UK Green Finance strategy has an explicit objective to be a place that attracts capital and investors who make decisions on jurisdictions based on their sustainable outlook. That’s one of the imperatives for the Sustainable Finance Forum; we have to do it in order to be able to attract the capital we will need to transform our economy and to grow.

We may still get someone quoting Milton Friedman from 50 years ago that “business is business is business”. Well, we’ve moved on a bit from then and it’s fair to say business has, as well.

The message from The Aotearoa Circle is that it is pointless producing financial capital if you smash our natural capital along the way, because people in future generations are going to need it. Some might say you need to be rich before you deal with environmental issues – you can just solve them when you’re rich.  But where do you buy biodiversity, once it’s gone?  And how do you know when you are rich ‘enough’?  Long term economic development cannot undermine our environmental capital.  We must figure out a way of being able to preserve those finite sources of natural capital and live within our boundaries, one decision at a time