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  • Sandy Trust

Ten Design Principles for Transformation

Sandy Trust is Head of Organisational Risk at M&G. We published the introduction to his IFoA essay in December (read the essay). In this blog, Sandy outlines the 10 design principles to develop a sustainable finance and economic system in the public interest.

Transforming the financial and economic system will not be easy. People don’t embrace change. There are significant incentives for some to delay these changes. But people can change and quickly, particularly when they realise that a significant number of other people also want to see the change, or put another way believe in a new story, thus revolutions.

These are rough first drafts of these principles, to be built on and developed further. There is clearly overlap with a wide number of existing recommendations. Broadly the priority order here aligns with systems change principles articulated by Donella Meadows*. Encouragingly there is already progress in several of these areas, sometimes significant.

1. Develop a new story of shared human prosperity.

We urgently need a new shared narrative of a prosperous and sustainable future to unite behind and work towards. This should be built on the familiar ground of increasing human prosperity but evolved to recognise that for us all to prosper we must address societal inequality and live within planetary boundaries. Our objective should be a good Anthropocene - low carbon, nature positive and just – that delivers long term value for all.

2. Evolve the purpose of the financial and economic system to deliver against this story.

Purpose animates and is key to success. With a clear sense of purpose, individuals, teams, companies and countries are capable of incredible feats, witness Ukraine. We must evolve national and corporate purpose to deliver long term value against this bigger picture of human prosperity, as well as delivering short term profit.

3. Re-design societal objectives to include equity.

One of the enablers of human progress is our ability to collaborate in large numbers through our mutual belief of shared stories. If we are to achieve net zero and other goals as a global community, we need to address real or perceived inequities. We need to rebuild trust between the Global North and the Global South, including addressing the challenge of providing capital to developing countries. We need to include vulnerable and forgotten communities. In short, equity and justice must become a central part of the shared story we must all believe in. Without this, it may be impossible to build the trust and faith we need in each other to achieve global collaboration between all countries.

4. Evolve accounting standards to capture long term value.

Externalities around climate and nature need to be reported on and eventually priced in. Just as the crisis of the great depression drove the development of financial accounting standards, so the crises we face today must drive the rapid implementation of sustainability accounting. We have to be able to measure and manage the impact of our activities.

5. Educate and incentivise stakeholders to deliver long term value.

This is a paradigm shift for many and education is required to ensure leaders and decision makers across the spectrum of human activity understand why these changes are needed. People must be nature and carbon literate. Crucially they must be incentivised to deliver long term value alongside short term profit.

6. Embed a stable climate as a central tenet of long term value.

A stable climate is a pre-requisite for human prosperity. Net zero and climate stewardship must be central to policy and corporate decisions. We must move from talking about the costs of climate change to the opportunities of the net zero transition, where energy is cheap, abundant and secure. We must then move beyond net zero to stabilise the climate.

7. Embed biosphere restoration as a central tenet of long term value.

We have been drawing down on nature, depleting the biosphere at a rate faster than it can regenerate. We need to become nature positive by recognising the value of nature, the Ecosystem services it provides and our dependence on it. We need to rediscover a sense of reverence and awe for the natural world. We must move to treating nature as an asset and move to a position where our ecological footprint is smaller than the rate of biosphere regeneration, to rebuild our stock of this singular and precious asset.

8. Include long term metrics and track progress against these to monitor long term value.

We will continue to need short term metrics to track progress, like GDP and profit metrics. But we need to build out and track longer term metrics, to measure, manage and report on long term value. Crucially we must elevate these metrics to the status of GDP, to intentionally track metrics around climate, nature and equity.

9. Move from reductionist to systems thinking.

Simplification and heuristics allow us to compartmentalise and are needed for quick decision making, great for identifying tigers in the jungle. However, we must embrace the complexity of the Earth system, recognising the essential interconnectedness of all things and move to a systems approach. A key component of this recognises that we are embedded in the biosphere, not separate from it – and that our financial and economic system has real world impacts that we need to measure and manage.

10. Change the rules of the game.

We must recognise the need for moral sentiments to guide the invisible hand and put in place guardrails for the economy, that align the objectives of the financial and economic system with societal objectives. For example, this could include pricing externalities, reducing subsidies for harmful activities or introducing environmental crimes.

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