Reorienting financial flows: the $12 trillion question
A recent report by the Business & Sustainable Development Commission (BSDC) claims to have identified market opportunities related to the UN Sustainable Development Goals (SDGs) worth at least $12 trillion a year by 2030.
To come up with this figure, the Better Business, Better World report looks at 60 market “hot spots” across four economic systems: food and agriculture, cities, energy and materials, health and wellbeing. The top 15 “hot spots” alone are estimated to be worth $6 trillion in potential revenues and savings by 2030.
Inevitably, figures such as these are little more than well-educated guesses. Nobody actually knows what the global economy will look like in 2030. But that doesn’t mean the $12 trillion figure is pie in the sky. In fact, it’s quite possible that it’s a significant under-estimate.
If, over the next 13 years, global policy-makers were to get their act together on pricing externalities — CO2 emissions, for example — that could increase the size of the prize by 40%. And a number of knock-on benefits of shifting the global economy onto a more sustainable trajectory are not priced into the $12 trillion figure. The empowerment of women, better health and education, reduced social inequality leading to less political turbulence — all of these would have a profoundly positive impact on global productivity and growth.
So $12 trillion is a conservative estimate. The real size of the prize, the report’s authors conclude, may be 2–3 times more.
But there’s another side to this story. New markets won’t emerge without investment. Unlocking these SDG-related market opportunities requires a massive re-orientation of financial flows. The BSDC estimates that an additional $2.4 trillion of annual public and private investment in low-carbon infrastructure, energy, agriculture, health, education and other sectors is needed.
The Brookings Institution estimates that, in total, $5–7 trillion of annual investment is required. This is eminently doable: ‘$5–7 trillion represents only perhaps 7 to 10 percent of global GDP, and 25 to 40 percent of annual global investment.’ Hence, the challenge is not so much finding new money to pay for sustainable development: it’s about ‘finding ways to reorient the world’s existing financial streams to be consistent with multiple SDGs at once, i.e., to advance some Goals without detracting from others.’
It doesn’t take a genius to see that the business case for aligning business and investment with the SDGs remains compelling. At a macro level, up to $7 trillion of annual investment to unlock at least $12 trillion of revenue and savings sounds like a no-brainer. But, alas, the global economy lacks the ability to act rationally and cohesively in its own long-term self-interest. So instead we must work with individual investors, businesses and policy-makers to nudge the system in the right direction.
I want to suggest that there are three key challenges we must address in order to reorient financial flows to align with the SDGs.
1. The battle for hearts and minds
Investing in sustainable development is often framed as a question of self-interest versus altruism. This is for the most part a bogus dichotomy. Firstly, as multiple studies have shown, investments and companies that integrate concern for ESG issues frequently out-perform those that don’t. Secondly, companies and investors that decide to go after SDG-related markets worth upwards of $12 trillion can hardly be accused of dewy-eyed altruism. Thirdly — and perhaps most fundamentally — the self-interest versus altruism dichotomy is based on a false assumption that thinking about the future isn’t in our self-interest. Unless you’re planning to die tomorrow, this is clearly nonsense.
The short-termism of investors and businesses is a disease that is doing untold damage to the global economy — and ultimately the long-term self-interest of those infected will suffer. Don’t believe me on this: believe Larry Fink, CEO of BlackRock, the world’s largest investor, with assets under management worth more than $5 trillion.
As we stretch our time horizons from quarters to years to decades, self-interest and altruism begin to blur. Many of those at the leading edge of attempts to reorient capitalism towards long-term value creation are motivated by concern about the world their children will inherit. Aviva CEO Mark Wilson goes one step further: he talks about ‘being a good ancestor’.
Clearly not all business leaders and investors yet think like this, but the momentum is in the right direction. A decade ago, the UN Principles for Responsible Investment (PRI) had just 200 signatories with $5 trillion of assets under management. Today, it has 1,400 signatories with a collective portfolio worth $60 trillion.
The campaign for hearts and minds should and will continue. But transforming global finance is a highly complex challenge: leaders with the will to do the right thing are a necessary but not sufficient precondition of success.
2. Data and reporting
Investors who want to align their portfolios with the SDGs need access to the right data. Companies are churning out data like never before, including on sustainability issues: more than 92% of the world’s largest companies now report on their sustainability performance in one form or another. But trying to make sense of it all is headache-inducing for investors. Some companies produce integrated reports; others produce “single bottom line” financial reports and then separately disclose non-financial information using frameworks like the Global Reporting Initiative’s.
There are three problems here. Firstly, most companies are not yet disclosing data in a way that makes it easy to assess their performance across all 17 SDGs. Second, the proliferation of different reporting frameworks makes it nigh on impossible to make meaningful comparisons between different investments in terms of their overall contribution to sustainable development. A survey by PWC found that 82% of investors were dissatisfied by the comparability of sustainability reporting between companies in the same industry — let alone across different industries. Third, in a world where almost everything seems to be speeding up, standard accounting and reporting practices are rapidly falling behind. As a recent paper by EY argues, companies ‘generally report what has already happened, providing only hindsight. However, what investors and executives really need are systems that provide insight.’ (Italics mine.)
This cluster of issues is what lies behind recent calls for the creation of an International Sustainability Standards Board (BSDC) and of ‘best practice benchmarks and league tables ranking corporate performance on the SDGs’ (Aviva).
At a time when algorithms are increasingly replacing human investors, the urgency of solving the data challenge is greater than ever. Many commentators worry about the decline of active ownership, which, according to estimates by Moody’s, will be eclipsed in the US by index and exchange traded funds by some time in the early 2020s.
A 2016 study by Sanford C. Bernstein, a research and brokerage firm, called passive investing ‘the silent road to serfdom.’ In their book, The Innovation Illusion, Fredrik Erixon and Björn Weigel argue that we live in an age of ‘capitalism without capitalists’. But perhaps this is just a transitional problem: the era of human capitalists may be in decline, but the era of artificially intelligent capitalists is only just beginning.
Artificial intelligence isn’t a miracle cure, but it does hold out the promise of better decision-making about financial flows, if — and it’s a big if — we can feed the algorithms with the right questions and the right data.
3. Trust — an essential lubricant
Money, as the bestselling author and historian Yuval Noah Harari reminds us, is a social construct. Its value is a fiction that relies on trust — trust that if I exchange my labour for money today, I will be able to use that money to buy stuff I want or need tomorrow. Tellingly, the word credit is derived from the Latin word “to believe”.
Trust, therefore, is an essential lubricant of the global financial system. But it’s in very short supply these days. It has never truly recovered from the crash of 2007–8. In the US and Europe, almost a decade of low interest rates has failed to overcome the banks’ post-crash wariness about extending credit to businesses. The tendency of corporations to hoard cash rather than invest in future growth is also symptomatic of trust being at a low ebb.
This crisis of trust is not limited to the financial system. It’s infected society and politics too. Trust in institutions, experts, data and facts has plummeted in recent years — and the negative consequences of this are becoming increasingly obvious as we look at the world around us.
Finding ways to regenerate trust is critical if we are to collectively build a sustainable future. There’s no quick fix to the trust crisis, but there are perhaps some green shoots that we should nurture. Leading thinkers like Rachel Botsman and Lisa Gansky see peer-to-peer models and blockchain technology as causes for optimism.
Platforms like Airbnb and Uber have convinced us to trust strangers enough that we unthinkingly do things our parents taught us for years never to do. How? Peer-to-peer reviews. As for blockchain, while it first pricked public consciousness due to its role as the technology that underpins the digital currency Bitcoin, it’s increasingly clear that its potential applications are far more wide-reaching, though, as Marco Iansiti and Karim Lakhani point out in a recent Harvard Business Review article, its most transformative impacts may yet be decades away.
Who wants to be a multi-trillionaire?
I don’t have an answer to the $12 trillion question. But I am at least starting to figure out who I’d want on my team when I go on Who Wants to be a Multi-Trillionaire? For starters, based on his Jeopardy experience, IBM Watson is a shoo-in.
We are planning to hold a 1-day workshop in London in mid-2017 (exact date TBC) to explore some of the issues highlighted in this post further — and, hopefully, catalyse action on system-level solutions to them. If you’d like to find out more, please get in touch at email@example.com.