Existential threats demand a long view

Tim Grafton. Photo / Supplied

Financing the future requires a long view beyond the traditional short-term thinking to satisfy short-term investment horizons.

Traditionally, there has been a sole focus on shareholder return as a proxy for how well a business is doing, but societal expectations are changing. They demand responsiveness to a wider set of values.
Failure to respond carries heavy reputational costs.

Existential threats like climate change will have a profound impact and demand we take a long view.

The challenge for the financial sector is to figure out how to transition from a focus primarily on financial wealth creation, to one that supports long-term social, environmental and economic wellbeing and prosperity for all New Zealanders.

A sustainable financial roadmap has two roles.

One guides investors to understand the impact of issues like climate change on their businesses and the other role complements this by enabling investors to understand the impact of their investments on the wider environment.

There are many obstacles in the way of drawing a roadmap. These include developing consistent and comparable ways of measuring impacts to inform investment decisions.

We need accurate and reliable data and a common taxonomy, so we are comparing apples with apples.

We need to change our incentive systems from a primary focus on the short-term to incorporate the long-term view.

We need leadership from the top and that will only happen on a consistent basis if the regulatory regime gives clarity and support to boards to make sustainability part of their mandate. This has implications for fiduciary duties and changes to reporting standards.

The opportunities of getting it right are enormous and the cost of getting it wrong potentially catastrophic.

Insurers are acutely aware of this. They have long-term investments and on the other side of the ledger they underwrite the risks those investments face.

They may also be underwriting negligent decisions made today that have a future impact and liability.

They know that a three-degree world may be insurable, but a four-degree world is not.

We need a world which is certainly insurable, so business can take risks and thrive on a sustainable basis.

More broadly, international studies show that businesses that report on environmental, social and governance (ESG) standards generally outperform their rivals.

Businesses are adopting an ESG framework and finding that this provides valuable insights into how to mitigate material risks, minimise costs, make better use of resources, increase productivity and create new business opportunities.

It can encourages diversity, and drive businesses closer to their customers' needs and expectations while becoming more attractive places where people want to work.

An ESG framework is also likely to add to brand value.

• Tim Grafton is chief executive of the Insurance Council of New Zealand

Read the Sustainable Finance Report here.