Dig Deep for Long-term Change

Root causes of systemic risks must be addressed, says Dr. Zita Sebesvari, Deputy Director of the UN University’s Institute for Environment and Human Security.

When UK-based asset owners sought to explain their asset managers’ divergence on climate-related proxy votes following a particularly fractious 2023 AGM season, differences based on investment horizons were deemed a likely underlying cause.

They were concerned that, despite warnings from scientists on the risks of delayed action on climate change, the short-term interests of asset managers “may be trumping long-term interests of pension funds”.

An analysis of voting and engagement activity commissioned by the asset owners identified “a varying degree of misalignment” between their long-term interests and asset managers’ stewardship processes.

When seeking to explain why managers were unable to effectively support the expressed interests of their institutional clients, one of the potential reasons was an approach to fiduciary duty that deprioritised risk reduction through engagement.

“If an asset manager is largely or predominantly incentivised by return or alpha, then the risk aspect is either ignored or limited to classic risk factors, with no consideration given to climate change or any other sustainability aspect as a systematic risk factor,” the report observed.

The asset managers could not take account of the future, because they were not being paid to do so.

This problem of prevailing structures and assumptions getting in the way of much-needed actions to protect our future on the planet is a familiar one to Dr. Zita Sebesvari, Deputy Director of the Bonn-based United Nations University’s Institute for Environment and Human Security.

The institute’s recently published report, ‘Turning Over a New Leaf’, proposes a theory of deep change with the aim of transforming the structures and assumptions that are responsible for today’s deepening inequalities and escalating environmental crises.

“Change can be uncomfortable, but going backwards won’t solve the challenges of a rapidly evolving world,” said Sebesvari, a lead author of the report.

Rotten fruit

In essence, the theory encourages us to focus on the root causes of shared global problems in order to bring about system-level change, rather than be distracted by quick-fix solutions. The report uses the analogy of a tree which is currently yielding rotten fruit because it has rotten roots, grown in soil that has become polluted by ideas and mindsets that must be challenged and replaced.

This can come about, the report proposes, by the combined use of inner and outer levers. The inner levers are the mechanisms that can be used to unseat the entrenched assumptions that support established but damaging practices, which can be scientific or educational in nature. The outer levers are the policies and actions required to translate system-level goals into practical structures and plans that deliver positive outcomes.

Sebesvari cites solar geoengineering as an example of a potential solution that does not address the underlying causes of climate change. Despite the many unknowns about its use at scale, it is possible that spraying aerosols could be successful in reflecting the sun’s rays away from the earth’s surface with the effect of lowering average global temperatures.

But it does not address the underlying cause of the problem, leaving in place the practices that will continue to drive climate change. To avoid wasting time and resources on superficial solutions like solar geoengineering, inner levers must shift assumptions from self-interest to global responsibility; outer levers can be pulled to create the necessary governance and commitments for coherent and effective action.

Sebesvari, who sits on the board of the Munich Climate Insurance Initiative, knows that finance professionals understand the power of underlying assumptions in determining real-world outcomes. For example, the outcome of cost / benefit analysis for an investment or other financial decision will be determined by a model’s inputs and assumptions, such as the discount rate.

“The way you set the discount rate will have a major influence on what kind of interventions or measures are actually viable,” she said.

“The finance professionals that work with those models have the power to set assumptions. Setting the discount rate according to a more future-oriented decision-making process would lead to very different outcomes, and would lend to support for certain types of investments.”

A shift in models and their assumptions to a more forward-looking orientation could help to tackle the inertia that stops finance professionals, including asset managers, from taking actions that offer the opportunity of long-term gain.

“We need to recognise that future generations’ benefits and risks are important to us, and must ‘adjust the screws’ in our decision-making systems accordingly,” said Sebesvari, noting the need to increase investment in resilience to offset the risk of future uninsurability.

Focus on the future

Unsurprisingly, ‘reimagine the future’ is one of five topics highlighted in the report as urgently needing deep systematic change. Short-term thinking is not confined to the finance sector, with decisions in many spheres of activity putting the ‘here and now’ ahead of the interests of future generations. The report cites as an example resurgent interest in nuclear energy, touted as an alternative to fossil fuel in response to growing electricity demand, despite the absence of a long-term solution for dealing with its toxic waste.

Sebesvari notes that some steps have been taken to reorientate decision-making toward the future in the notoriously short-termist arena of politics.

Established in 1993, Finland’s Committee for the Future – populated by 17 members of parliament – serves as a national think tank and reports annually on long-term policy challenges and opportunities. Finland hosted the first World Summit of the Committees of the Future in 2022; Chile, Iceland and the Philippines are among the countries to have set up similar structures.

In the UK, the Welsh government has created an independent Future Generations Commissioner to serve as a “voice for people not yet born”, assessing the impact of government decisions on future generation. These approaches have varying merits, said Sebesvari.

“But it would be good to have formats which also have a recall right over certain decisions which might have very long-term consequences,” she said.

“I’d like to see models that go beyond the think tank function, having an influence, perhaps via a right of veto, in order to represent future generations at the decision table.”

Signs of encouragement

Sebesvari concedes that pulling the ‘outer levers’ to achieve deep and systemic change is particularly challenging in a policymaking environment wracked by military conflict, geopolitical tension and weakening commitment to multilateralism.

As a prime example of science, industry and government coming together to implement a long-term solution to a common threat, the report cites the Montreal Protocol. Signed in 1987 and ratified by all UN member states, the agreement provided the policies, expertise and financing needed to phase-down ozone-depleting substances (ODS), allowing for the restoration of the layer of the Earth’s stratosphere that protects it from ultraviolet radiation.

According to the UN, parties to the protocol have phased out 98% of ODSs compared to 1990 levels, putting us on track to save two million people a year from skin cancer by 2030, while also making “the single largest contribution” to climate mitigation efforts.

One might argue that the Montreal Protocol stands in stark contrast to more recent efforts to achieve global consensus in support of common environmental objectives. COP29 was generally perceived as having an underwhelming outcome on climate finance; COP16 needed to reconvene in Rome after failing to reach agreement on resource mobilisation in Cali; while efforts to sign off on a Global Plastics Treaty last November are now scheduled for a second push in August.

Multilateralism is far from dead, according to Sebesvari, who takes heart from the fact that a coalition of high-ambition countries staved off attempts to settle on a weaker agreement in Busan.

“The overall political climate is not very supportive, so we don’t know how this will end, but I find it encouraging that there were around 100 countries who were willing to sign the ambitious version of the treaty,” she said.

Sebesvari was also cheered by that fact that the negotiations have taken a deep and systemic approach to the problem of plastic dependency, rather than just trying to deal with the resulting pollution through recycling.

‘Rethink waste’ is another of the new report’s themes, making the case for a more comprehensive embrace of circular economy strategies, and noting the wasteful and inefficient nature of our utilisation of limited resources, such as lithium. In terms of ‘inner levers’ the report calls for a shift away from a ‘new is better’ mindset, and the perception that material production and consumption is a sign of progress.

Positive energy

One final mindset shift that Sebesvari believes we need to make is the one from negative to positive.

‘Turning Over a New Leaf’ recognises that progress on deep system change is hard, and will face many sources of resistance. Implementation can be stalled by conflicts of interest, fear and systemic inertia, but these are just the headwinds that inevitably accompany meaningful action. Sebesvari argues that we limit ourselves when we focus only on preventing the worst, rather than striving for the best.

“Just a few weeks ago, new numbers showed a record 15% annual growth rate in renewable energy capacity additions. We are so focused on the bad things, that we miss out the good news,” she said.

“Current developments are increasing uncertainty and making it much harder to plan. This uncertainty is teaching us avoid lock-in routes, keep options open and try to make decisions with future risks in mind. If we see climate change as one of the major challenges for the future, that will help guide decision making today.”

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