The levers of change

Donella Meadows defined a system as “an interconnected set of elements that is coherently organised in a way that achieves something.” In Limits to Growth, she and her co-authors argued demography, the economy and the environment together embody one planetary system with innumerable interactions.⁶

“The idea of being able to look outside the box and make connections was pivotal,” says Dr. Nafeez Ahmed, director of global research communications at thinktank RethinkX, of Limits to Growth (see ‘Know your limits: An interview with Nafeez Ahmed’).⁷

However, systems don’t always achieve what we want them to. Stocks and flows are a system’s core elements – notions that will be familiar to many in the financial realm – while feedback loops are the interconnections between those stocks and flows that influence them.

Figure 1: Positive and negative feedback loops

Source: Aviva Investors, August 2022. Adapted from Rafael Laurenti, May 2016⁸

As explained in Limits to Growth, changing a system therefore requires changing the structure of those information links: “the content and timeliness of the data that actors in the system have to work with, and the ideas, goals, incentives, costs and feedbacks that motivate or constrain behaviour.”⁹

The OECD published a 2020 paper that set out new economic goals – environmental sustainability, improved wellbeing, lower inequality, and greater resilience. It argued these need to be built into the structures of the economy from the outset, alongside integrated policy and performance indicators, requiring extensive institutional innovation.¹⁰

Tackling the root causes of a problem is often difficult because it takes more time and money and can entail more uncertainty than applying a “quick fix”.¹¹ It typically requires changing the goals of the system (creating a “paradigm shift” in systems terms).

Companies, investors and policymakers need to look beyond shareholder value maximisation, modern portfolio theory and GDP. And although recent debates have questioned the role of the financial industry and ESG investing in the transition to a more sustainable economy, macro stewardship will be central (see Redefining stewardship: Why stakeholder capitalism needs to wake up).

“One of the fundamental things missing from any debate which says this is solely the preserve of governments is a recognition of the scale, influence, and expertise of the financial system,” says Tayler. “A lot of the answers and ideas lie within the system itself.

“Yes, governments have the primary levers, but we must use our expertise and insights to ask them to give us the right enabling conditions to achieve net zero, biodiversity and social goals, and ultimately to help make that paradigm shift,” he adds.

This also means shifting a paradigm of finance itself: industry players need to understand they don’t have to passively accept the level of risk of the system but can instead try to influence it.

To change mindsets in financial services, Jess Foulds, senior manager for global responsible investment at Aviva Investors, recommends using an array of approaches to change incentives – embedding long-term value creation in individuals’ assessments, for instance – and education, including MBAs and the CFA.¹²

This shift is needed in both financial and economic policy. Key policy influencers and actors recognise this, and are now calling for profound change, as well as proposing solutions. For instance, Earth4All is a collective of leading economic thinkers, scientists, and advocates offering a vision for a new economic and social approach.¹³

Sandrine Dixson-Declève, Earth4All project lead and co-president of the Club of Rome, says: “For governments, we recommend moving beyond a singular focus on economic growth to include natural and social capital.”

Unfortunately, the interventions to date have not been of a scale or nature to deliver systemic change.  

“The finance system is critical because we have built our global economy around it,” says Tayler. He adds that, if the theoretical role of finance – through investment, underwriting and banking – is to allocate capital to where it will best serve society, then the financial system is not working as it should.

“Taking a systems-thinking approach to the role of financial services, our duty to act in the best interests of clients and to promote market integrity should extend to issues that undermine markets and financial stability,” says Foulds.

Figure 2: The current architecture does not deliver optimal outcomes for society

Note: This is not a completely exhaustive view – but highlights key global organisations due to their mandate. *Illustrative examples.
Source: Aviva Investors, September 2022

Foulds argues that, to correct those market failures, the finance system must engage with governments, policymakers, and global regulatory bodies to reset the rules and align incentives and penalties with sustainable behaviours.

Systems change typically follows an S-curve: early adopters gradually push boundaries, then comes an inflection point when change becomes self-reinforcing and exponential. The financial and economic system is still in the early adoption phase, but when change takes off, the impact could be game-changing.

“Markets are incredibly powerful,” says Tayler. “If you give them the right goal, they can become an enormous accelerator for sustainable action. That is why there is still hope, despite how late we have left it, because we haven’t really gone “all in” on concentrated climate action yet as a society.”

A powerful way to do this is to use “ambition loops”, whereby governments set clear policies that give businesses the space to innovate and accelerate sustainability practices. “Financial markets want to allocate capital to businesses that will succeed in the new policy environment,” he says. “Instead of it just being a feedback loop, there is an even more powerful “triple helix” revolving on and reinforcing itself. That is how macro stewardship can be an accelerant to the positive ambition loop.”

But to achieve those transformations and create powerful new feedback loops, key leverage points must be actioned.

Donella Meadows identified the 12 most effective leverage points in a system.¹⁴ When mapping them out, Aviva Investors’ macro-stewardship team translated them into financial terms (stocks and flows of financial rather than physical resources, for example), and identified six areas of maximum leverage: fiscal policy; regulation; market mechanisms; standards and norms; consumer awareness and behaviour; and litigation.

“Different people might have more leverage in one particular area or put the fulcrum in a different place to make it more effective,” says Tayler. “But we need to use all these levers.” They will also overlap and bleed into each other at times, but nevertheless allow for a clearer breakdown of the necessary actions.

From a climate perspective, implementing a significant carbon tax will be essential, so the biggest emitters pay the price of their contribution to global warming and are incentivised to reduce emissions.

This will be helped if market mechanisms are used to internalise externalities, so we finally stop counting the consumption of natural capital as income and begin incorporating the cost of pollution and emissions.

Foulds believes the general push for greater disclosure of sustainability risks and, more recently, principal adverse impacts, particularly in EU regulation, is playing a key role. “Sustainability risks are predominantly those risks that are already financially material, but principal adverse impacts look at the impact investments will have on the environment and society,” she says.

Pushing for industry standards through relevant codes like the UK’s Stewardship Code is also important because, even before they become a regulatory requirement, these norms have a significant impact in shaping behaviours. However, Tayler adds investors engaging in macro stewardship must be transparent, to demonstrate they are not using their influence for narrow self-interest.

Concerned citizens are also increasingly acting through litigation, against both companies and governments.¹⁵ “As macro stewards, we should not rule out using litigation where we think it's the right thing to do, but we also need to understand the environment in which litigation is a material risk for governments and companies,” says Tayler.

Systems change is difficult by definition, requiring us to rewire what are often deeply ingrained ways of thinking and processing, and to fight against powerful vested interests. It would be easy to fall into passive acceptance of the status quo. However, such acceptance is not only dangerous; it also ignores the huge potential upside of reshaping outdated conventions.