#7- Why Φ 4 δ?

I have received a lot of feedback on this newsletter. Thank you! It is always welcome and helps me think and improve. One recurring question I have still not addressed is why “Φ 4 δ”?

The easy answer is that the Greek letter “Φ”, or “Phi”, stands for Finance and the mathematical symbol “δ”, or “delta” (also a Greek letter), stands for change.

Thus, the name of this letter reads as “Finance for change”.

But we must dig deeper into the “Why?”. Now, “Φ” also stands for Philosophy: Why do we need change in the first place? If change is desired, what kind of transformation should we thrive for? What might prevent our success and how can we change? Or at least, how can finance contribute to our goals?

I confess I do not hold any answer. Actually, I am always wary of obvious answers; as the neuropsychiatrist Boris Cyrulnik put it "beware of clear ideas, they are reductive". There was a time when we thought lobotomy could help people stop smoking... Yes, "the road to hell is paved with good intentions". So I have thoughts and share hypotheses which I am happy to discuss in order to deepen my understanding and, maybe, for us to find bits of solutions.

Need to change?

I have addressed the need for change in previous letters and literature is abundant, from the Meadows report in 1972 to the IPCC reports early this year or last week's article in Science on the triggering of climate tipping points.

But the need for change should also be evident for anybody looking out. Everywhere: droughts, fires, inundations, landslides, shortages, deaths and suffering...

However, I may be missing something as this need still seems largely ignored. War in Ukraine adds to the suffering; it is not the change we needed. Tensions in Taiwan are not helping much either. Actually, China decided to retaliate by suspending cooperation with the US on Climate issues! To be honest, I am not sure how bad that is considering China is already responsible for more than half the coal fire plants under construction (numbers here) and the Supreme Court in the US has pretty much cut the Environmental Protection Agency's capacity to fight climate change. This epidemic of denial is certainly a subject for another letter, but let's not go down this route now... it can rapidly become depressing.

On a side note, I was recently accused of hurting feelings when I referred to global warming in a business minded group discussion. I am a humanist and believe everyone does his or her best with the cards we are dealt. So I may strongly disagree with some on various topics, but I would not attack anybody personally; we all have our circumstances and I certainly made my fair share of mistakes. However, some uncomfortable facts are real. Yes, food will get expensive next winter (mainly due to war and droughts). And many will go hungry. It is not only feelings that will get hurt. I am sorry.

Transformation?

The UN SDG goals may not be perfect, but they are the only globally agreed upon framework. And they are more than good enough to get started! We can continue to learn and improve on our way to 2030.

Now, how we can change is much harder question as most environmental and social challenges we face are complex and interconnected. Many solutions are dreamt and some are being tested.

I would hypothesise two main hurdles. One is that whatever solutions we end up with, they will require changes in habits; and those are hard! The other is that after ages of specialisation, we now need to broaden our horizons in order to embrace the complexity of interconnected challenges. We need to look beyond our fields of expertise, explore topics further and expand our understanding of issues. I will come back to both these subjects in upcoming letters... (and maybe a book!)

The contribution of finance

Finance could do nothing and consider this debate out of its range. Our fiduciary duty is to maximise profits and, after all, impacts are mainly at the corporate level. "Why would I give a sh*t if managers do wrong with the money we gave them?" If you subscribed to this letter, you probably guess what I feel about this argument. Europe has largely settled this debate, but it is still raging in other places, like here or here.

The next step up is to integrate simple materiality: How might ESG issues hurt my profits? How can I benefit from the transition? The reality of change is recognised, but with a narrow "profit-centric" approach, the systemic needs are ignored with a very high risk of backlashes. For example, as people will have done their "ESG homework", they might think that problems are addressed via "sustainable" approches. But a lack of alignment might generate unclear messages or conflicting signals and create undue repetitional risks. Not all greenwashing is voluntary!

Next step up is double materiality:

How can I become aware of externalities to reduce harm and maximise systemic benefits? This is where most investors should be in my view. And this is what European legislators intend to impose as a minimum.

Regulations are clearly a powerful lever for change. Europe is leading the charge and is thankfully inspiring others, even if there is still a long way to go. Rules around reporting (EU Taxonomy, CSRD, SFDR...) aim at increasing awareness about sustainability issues at the ground level (see my previous letter). Rules around Climate Transition and Paris-aligned benchmarks aim at making the required change visible. And rules requiring institutions to ask about end-investors' preferences will hopefully help align financial products over time.

I will happily agree that it would be better if we could change without the need for such a strong regulatory "nudge". Rules will always be imperfect and leave loopholes that some will brilliantly exploit. To paraphrase George Serafeim: "It would be better to shift corporate mindsets from compliance to innovation and growth to truly integrate sustainability into strategy." Yes. But the uncomfortable fact is that this mindset shift is not happening nearly as quickly as needed... so regulations are filling the gap.

Next, impact investing is for the purists: "What is the issue that bothers me enough that I will build a business to solve it?" For example, one might want to support the development of emerging countries by helping local entrepreneurs and financing renewable energy. That person could start a project like the Gaia Impact Fund. (Oops, I just broke my rule of never promoting companies in this letter... not even my own work. But what Gaia and other impact investors are doing is really inspiring!) Impact investing may be hard to scale, but it should be a source of inspiration to all investors. Hence, it will also be the subject of upcoming letters.

So, why “Φ 4 δ”?

Because I want to help finance move up this ladder from business-as-usual to ESG to impact. But in the end, it is not the terms "ESG" or "impact" that count. It is how we transform our world into something sustainable. I recently saw an advertisement saying: "We are producing our products without excessive waste!". Wow! Imagine bringing your kids to school and the teacher saying: "We are educating your kids without excessive beating!"...

As usual, this is meant to be a discussion. Please share your comments, ideas or questions! And since many of the topics I have mentioned will require further letters of their own, let me know if some are of particular interest to you.