The Great Reset - Idea through to Implementation

Current talk of saving the Planet but is about sustaining Humanity - the planet and lifeforms on Earth can survive even a collapse in the current ecosystem but how will the Human Race fair – remember T. Rex. RIP

In the Corporate world this is articulated as a reset of how the capitalist world accounts for its economic activity. In this Article I wanted to share a high level approach to framing the complexity and addressing the challenges of moving to a more balanced culture and “Values” led capitalism. Whether considering the path ahead as a business, institution, investor or an individual there needs to be a mind-set shift. Central to this is understanding that there are four pillars to a sustainable future and four types of Capital to understand and nurture.

2020 has been a year of summits, conferences and webinars in the last few months buzz words like sustainability, reset, new normal and the like abound. 2020 is however a warm up for the delayed COP26 in November 2021, In fact in the last three months we have had an update of thinking and work originally targeting the original COP26 date of November 2020. 

The problems we face have however been on the threat list for years but people tend to have a short attention span and live if not in the moment in the short term so we seem to be continually shocked by regular once in a hundred year events.  COVID 19 has given many more time to reflect and think about our core values and on the risks and weaknesses of the systems that sustain life as we humans want it to be, as such perhaps a leg up in enabling the change process.  Scientists, activists, policy makers and business leaders have been more to the fore and for those with time to listen beyond the soundbites we can think and learn and put in context what is important.  As these diverse voices have come together in a maturing debate about what threats might be out there ideas and frameworks have emerged to prepare for and mitigate future risks. 

Happily there is growing agreement that action is needed and those working on frameworks and processes are now getting into the weeds of how to make change happen, into the complexity and connectedness of all the issues: Climate Control, Social Justice, Bio-diversity and the consequential adjusting of the trajectory of human activity. 

It should be realised that this is as much a change management process as spreadsheet problem with technical and innovation saving the day magically. Voluntary action and talk will be insufficient to transition fully to a sustainable future as inertia and a persistent overall human bias to self-interest mean mandated action must follow the pioneering work of forward looking voluntary action.

Voluntary adoption of sustainable accounting be it triple bottom line or other models and Philanthropy/Impact movements have provided a basecamp and knowledge base. Having been a testbed for developing understanding, metrics, solutions and innovative business models it will take mandatory action on a co-ordinated global scale if we are to make it all the way to a more sustainable relationship with both the planet and ourselves.

The Current Situation

We are at the dawning of major changes, at least I hope so, the mainstreaming of debate over sustainability, resilience and climate apocalypse is throwing new light on the inadequacies and unaccounted externalities of human activities at a time of technological innovation that enables system and process transition.  The need for change has been apparent for a long time but despite the science and maths evidence and obviousness the reality has only really filtered down in recent years to the majority of the population. It has taken media coverage of climate change evidenced by increased extreme weather floating islands of plastic waste and barren land where ice fields once spoke of a clean untouched wilderness.  Only with the advent of multiple crises has the evidence gained mainstream media exposure to force a global awareness.

Although it is possible intellectually to figure things out in a dispassionate way, employing critical analysis, it usually takes an emotional response to the facts to initiate real action. David Attenborough and Greta Thunberg have been able to contribute a broad emotional trigger. Often an impending visceral crisis is needed for a democratic governments to act and risk unpopularity with tough actions as parts of society are forced to change behaviour. The reality of the pandemic and a Biden administration bringing the US back into a global consensus taking action on climate change are promising ingredients in 2021 the year of COP26.

The accumulated problems brought on by unaccounted for externalities have been neglected as a result of the inherent short term focus of decision making often reinforced by societal guardrails that have dis-incentivised long term thinking among systemically important leaders. Here we can consider politicians and the political cycle with near perpetual campaigning in an electorate hugely fragmented across often conflicting issues. Corporate leadership tied to annual incentives and USPs often linked to financial only metrics which are often disconnected from their actual personal long term performance.

Those familiar with behavioural psychology will know the behavioural biases and patterns that help us live day to day with little cognitive effort but often result in group think and behaviours contrary to those suggested by cold logical. When critical thought and consideration demands a revision of our longer term outlook and business as usual it butts up against long held beliefs and behaviours and the inertia they create. These basic cognitive mechanisms routed in millions of years of biological evolution enable us to manage life with minimal effort. They have deep systemic benefits that allow the collective organisations that make up society to operate semi-automatously helping society to function at scale, however they also inhibit the ability of society to change and adapt to changes faster than on a generational time scale.

Problems have arisen from these behavioural factors working in a society focused on financial metrics as both targets and qualitative judgements over social standing and often personal self-esteem.   From an accounting perspective significant unaccounted externalities impacting nature, society and individuals are now revealing themselves with tragic consequences and costs for society and individuals. Even in the face of scientific evidence reform of rules and duties that shape behaviours and constrain the incidence of negative externalities the inertia of the system has shown itself shockingly slow to react. A combination of systemic biases and conscious vested interest work to slow and shape change for partisan advantage. A crucial element is to convince leaders from all stakeholder groups of collective need, urgency and benefits.

The fact that external costs are now graphically evident in the current Pandemic and the extreme weather and threats associated with climate change helps to evidence that issues transcend the local and are of global concern. As a hook for media to mainstream the debate is allowing the process to move ahead. As we enter a period of resetting rules, accounting systems to track and impacts on sustainability and aid allocation of responsibility and accountability we face a huge challenge to get the new rules right and to ensure they are enacted effectively. The science is being done but the track record of achieving systemic change at pace is a little terrifying on the scale required. A diverse coalition of stakeholders has to collaborate to manage the required changes.

Four types of Capital on which to build a sustainable human future

1.     Financial Capital – It seems we measure and try to articulate everything these days in financial terms. Society keeps track of both the stock of financial and material assets in monetary terms; as well as making transactions involving non-financial assets and services in monetary terms financial outcomes are given primacy in judging success. A well-rehearsed and defined framework exists and is globally accepted but it is failing to produce a sustainable world as negative externalities are not captured and given value. Pure financial metrics have the dominate role in judging worth and focusing economic activity at the expense of other areas of importance for a sustainable future.

2.  Human Capital – Important to the private sector as a support for generating and maximising financial outcomes but often neglected beyond an economic imperative by the private sector and sometimes just plain neglected. It is left to government and individuals to invest in Human Capital: education, health, happiness and respect for human rights. While these have some impact on financial return a large element of impact falls under Public Goods and the returns are predominately long term and personal although collective in their effect.

3.     Social Capital – This makes up the cultural and institutional fabric that allows people to work collectively and accrue the benefits of team work/collective endeavour. Again the Financial world has a role but a great deal of society’s social capital is generated by individuals engaging with one another to create and enrich the fabric of society. Government has the lead role investing to build the institutional and physical infrastructure to allow the development of social capital. Often government subcontracts to commercial entities to provide public goods, services and infrastructure. Indirectly this is funded via taxes and debt via the financial system and intermediation of financial capital. Private entities investment in the social capital is usually termed its social contract or maintaining its social licence.

4.    Natural Capital – Underpins a healthy biosphere that has to support us and our demands. It is a complex ecosystem that we with only moderate understanding have been modifying in the belief that we can do better with a focus on maximising growth and immediate needs of a growing human led demand on planetary resources. The impact on the Natural world has been to progressively commit land and resources to meet the needs of humans at the expense of diversity and natural resilience as industrialisation and artificially controlled environments have replaced complex eco systems with an adaptive resistance.  Harmony not dominance should be the watchword in our stewardship of the planet.  Natural Capital achieves two major functions for human society firstly it provides raw materials and food and this capacity needs good stewardship to ensure long term sustainability. Secondly it is the source of resilience through biodiversity which is not only a source of inspiration and unique biochemistries and inspiration in many STEM advances but is the basis of resilience in the face of environmental change allowing ecosystems 

There are multiple linkages and dependencies between these four types of capital. Often but not always interactions involve the use of the financial system and financial capital to enable and facilitate activity. 

Four essential Principles to underpin a reset

1.      Base analysis on science not political dogma or self-interest. Sound metrics will enable accessible and comparable monitoring of relevant and impactful key indicators. Based on data sets with clear scientific validation and materiality to the impact. Data sets that are not reliable or no standardised are apt to be at best of little use at worst a source of green washing and PR spin allowing avoidance.

2.      Transparency and accountability, standardised methodology and public reporting of impacts across all four capital pillars.  Report and recognise the importance of all four in law, social and granting of financial and societal rewards.

3.      Alignment with respect to the four types of capital. A clear statement of Impact prioritisation and perspective is needed. Context, and impact focus given a complex reporting challenge will help external and internal assessment. Defined responsibilities and accountabilities that are enforceable and on outcomes that are verifiable to manage and direct desired outcomes.

4.      Mandatory responsibilities and accountabilities Clear and enforceable rules consistent with best practice and the science. Voluntary action and unchallenged self-regulation risk extensive free rider behaviour with exploitation of potential unfair playing field. Systemic inertia and vested interest will be the biggest change management challenge to a true transformation. Here the creative and more social sciences have a vital role in enacting the hard analysis arising from the STEM experts defining how the four pillars interact for different industries and processes.

Four key groups - their roles and interests in taking action

1.      Individuals matter as the sum of their actions can collectively make a difference. But behavioural sciences have a contribution as do leaders and media channels in mobilising collective action. The outcomes of activity and decisions need to be presented in terms of impact across the four pillars. Impacts need to be framed in a way that individuals can relate to their core values and needs not just a financial impact.

2.      Government In theory, at least from a western democratic view point, should be the steward if not the provider of the infrastructure and architecture that supports a sustainable society with a sustainable balance of rewards among stakeholders. This is through setting rules and being the lead supplier of Public Goods for the benefit of society. Government is often responsive rather than proactive so moves only when popular demand is strong enough otherwise (or cynically this includes responding to societal demands) it follows an agenda heavily influenced by the individuals in charge. 

3.      Media have an immense role in shaping the narrative and in educating the population. Independence and professionalism, or not, of the media are crucial to change and establishing a reset of the system along informed science backed system understanding. Media controlled by vested interests or dependent on vested interest groups will have biases and motive to favour those interests. The informational noise of “free media” with no rules around social media and multiple vested interest groups manipulating the agenda make reasoned public debate a challenge. Nonetheless informed unbiased able communicators are vital to carry all stakeholders to a sustainable conclusion. Human nature is biased to a short term time scale and an individual or familial survival prioritisation. The societal structures that have evolved at various times adopt group behaviours and rules that allow larger populations to prosper. Many such sets of societal systems have evolved and died out. As a species our evolution is dominated by societal and now technical evolution the cycle of biological evolution for a long lived species such as Homo sapiens is slow.   

4.      Asset Owners as the owners of Financial Capital, stewards of Natural Capital within their ownership and employers of Human Capital have a crucial role to play. In the decades since Milton Friedman’s work was taken as a simplistic permission for the agents of capital owners to focus on financial returns a primacy of focus has over the decades became imbedded in the incentives and culture for both asset managers and many C-suites. Asset owners set mandates and corporate priorities so more active oversight, guidance and governance can go a long way to setting a more sustainable set of priorities to be responsible for behaviour towards all four types of capital by the private sector. Historic failure to account for the long term cost/value of these Capital types have led over time to negative impacts (both intentional and unintentional) on the stock of these capital types as accumulation of financial capital has had priority. 

Four Phases to the system reset

Change is an evolutionary perhaps generational journey but one that needs to move at pace and have active co-ordinated management. Although the final goal maybe transformational it requires careful and agile execution especially when people and diverse interests are involved. Complex interrelated systems are difficult to model and an agile and evolutionary mind-set needs to apply to the process to accommodate unexpected consequences and better understandings overtime.  Inertia in society and the general population including leadership is hard to shift and challenge comes in the most part from fresh minds and fresh energy as well as evidence and argument.

It is useful to frame this as a four phase process to judge the pace and maturity of the transition. The phases not entirely sequential or distinct as far as execution is concerned. High level co-ordination and system thinking and inclusion of both high level stakeholders and domain experts is needed. Diversity of thought and representation in the debate is crucial as a new dominant culture is evolved.

The Paris Agreement was a watershed in global agreement on the problem and crucial in spurring phase one. COP26 can be a focal point in moving Phase two forward.

Phase One

The range of ideas and philosophies that can govern society are not new over the ages and the values different types of capital support have been debated through history although their importance has ebbed and flowed as over times. Contributions from diverse stakeholders are the feedstock for reshaping capitalism but must be based on sound technical and scientific knowledge to be credible and sustainable. We have both a detailed base understanding of the science and relationships between these types of capital to build on. Phase one must draw on the ideas and lead to the adoption of a holistic framework globally accepted will be a long term work in progress. At a high level this is relatively advanced. The UN SDGs define the diverse elements and the SDGs can be mapped to the different types of capital and across human activities and identify stakeholders with particular responsibilities, accountabilities and abilities to have an impact.

Phase two

The ideation or innovation of ideas solutions and frameworks needs to drill down and coalesce into a system that although it may use a financial currency to mediate transactions and behaviour sets goals that value all four types of capital. With a technically curated set of ideas that society can to debate honestly and reach a collective view of the values that are important and implement penalties and rewards for respecting an adopted set of values intended to deliver a sustainable and just future. The challenge will be to find and transition to a commonly agreed framework(s): principles, taxonomy and measurement methodologies. Second comes the adoption of these in laws and common practice through accepted social contracts that are widely accepted by all stakeholders will have to take place. 

This requires courageous leadership with a long term vision and co-ordination and common purpose from all sections of society. It is not as simple as passing laws but requires imbedding a mind-set in all of society that rebalances goals and acknowledges the reasons and benefits of change. While leaders in all of walks of life will define the system the debate must include the wider population otherwise change will fail something seen in any organisational change management transition.

This phase becomes highly political as states and interest groups will balance their open interests against the greater good. Both leaders and Media have a huge role in moderating partisan instincts and focusing on long term sustainability and global risks of failure.

Phase three

This arguably overlaps with phase two. Transition needs to be managed and led as increasing detail is added to rule and cultural shifts. Governments have a central role here in enacting and shaping the rules of the game but so do NGOs focused on this transition. Much of the reset involves recognising and rewarding the value of “Public Goods” and their real impact with respect to all stakeholders and the role of Human, Social and Natural Capital in a sustainable society and economy. Government has the role of ensuring public goods are being provided and fairly distributed to deliver a healthy society. 

This role is funded through the financial system. Through taxation and regulation with penalties society funds expenditure on public goods and services either directly or via association/contract with private enterprises. The taxation system can play a role to reward and punish positive and negative contributions or externalities to encourage private organisations and individuals to act synergistically with delivering a growth in non-financial capital. 

However a cultural mind-set shift that assigns responsibility and accountability beyond financial return to the private sector will help. Legal rules are only part of the way to manage behaviour. There is a social contract implicit between all stakeholders and this is less ridged but should provide boundaries of acceptable practice and responsibilities to society, nature and other stakeholders.  Channels and ways to recognise and promote contribution to the stock of non-financial types of capital need to be strengthened. While individuals given information and time to reflect are able to put “values” into context when they live in a societal echo chamber that focuses on short term and financial outcomes perspective is lost and unfortunate unappreciated consequences build up until they create a crisis and demand a solution.

Phase Four

This phase is refinement, debugging and adjustment as understanding and impacts become evident. Lots of work to better understand dependencies and feedback mechanisms between human activity and the health of individuals, society and the planet and diplomatic and regulatory vigilance to monitor behaviours and the human trait of free riding if it can be done with no real consequence.  Nothing here that isn’t part of how any society should work to continuously adapt and improve. Just now fitting behaviour and governance to a wider reset of objectives and awareness that the weight of human activity on the planet is such that the margin for error is small.

In Conclusion

So far climate action has been given primacy as the most immediate existential threat is seen as climate change. As a result much of the action to date is focused on achieving the goals of the Paris Agreement although there is a wider realisation that a broader spectrum of issues need addressing. At a State level the EU is probably most advanced in making these issues central to policy. Academic work and pilot schemes and many corporates are adopting a more pluralist capitalism in their corporate vision.

Frameworks to move from Shareholder to Stakeholder Capitalism, from Financial Capital to multiple Capital type accounting deserves a separate article. There are a plethora of organisations both government and multilateral organisation plus more industry specific or domain specific in origin developing revised business and economic models.

Two ideas stand out as common threads and are being widely adopted by those seeking to develop frameworks and ways to make judgements between different “Values” as they balance the role of the four types of capital and articulate possible solutions that will contribute to the transition.

The UN Sustainable Development Goals – mapping these to frameworks and economic models or activity footprints is one common theme.

The idea of sustainable planetary boundaries for human activity as context to assess economic activities and business models is also being widely adopted having been featured in Nature in 2009.  

Connected to this is a movement to consider circular economic and business models where resources are recovered reused or recycled minimising the strain and impact on the planet.  

There are many economists proposing variants of his boundry approach. One that exends the boundry approach from the area of Natural Capital to Human and Social is Kate Rawlings work promoting both ecological and Societal boundries  thus adding concepts falling under Social and Human Capital .

Different groups make different assumptions and have different taxonomies and over time as more recent studies and relationships assessments have shifted. This is likely to continue however standards of measurement and common taxonomies will help coalesce approaches around a more globally accepted framework.