How the false promises of sustainable finance shattered my perspective on change

If the status quo serves your interests, even if you know that changing it would benefit the common good, would you do it?

In the previous piece I sketched out my point of departure for this series, explaining how my upbringing and experiences living abroad have fundamentally shaped my perspective on our responsibility to each other.

It’s one thing recognising what drives you, however, and it’s another thing putting it into action.

I have spent the last five years working in the world of sustainable finance. I was given the tools to look under the hood of a system which claimed to be changing for the better. What I learned along the way opened my eyes to how little I truly understood about how change happens and sowed the seeds for this series.

Finance as a force for good?

Financial institutions and companies hold a pivotal role in shaping our society and economy. They drive innovation, create jobs, and facilitate the flow of capital, which in turn supports economic growth and development. However, it is becoming increasingly clear that these entities also contribute significantly to some of the most pressing issues we face today. From exacerbating economic inequality to accelerating climate change, the negative externalities of unchecked corporate behaviour are profound and far-reaching.

In response to these challenges, the financial markets have begun to embrace new paradigms such as Environmental, Social, and Governance (ESG) criteria, sustainable finance, and impact investing. These frameworks aim to align financial activities with broader societal and planetary goals, promoting practices that not only seek profit but also foster environmental sustainability and social equity. Proponents argue that integrating ESG factors into financial decision-making can lead to more resilient and ethical business practices, ultimately driving positive change.

However, understanding and mitigating the impact that companies have on our planet and society requires comprehensive and reliable data.

At the company I was working with, we developed datasets to tell you different things about the sustainability (or lack thereof), of companies, ranging from biodiversity, human rights, greenhouse gas emissions, and beyond. I used these datasets to write papers on the state of sustainability within financial markets, within the context of the ‘ESG boom’ and growth in green communications coming from within the worlds of big business and finance. It was a tool, in other words, to look under the hood of big corporations and financial institutions.

What I found would start me along this journey to where I am today, and fundamentally shift my na?ve perspectives on how change happens.

Beneath the shiny surface of finance and under the veneer of sustainability, ESG and impact investing, are long shadows which continue to plunge large swathes of our world into darkness.

Sustainable finance is a wolf in sheep’s clothing

Again and again, analysing the data and writing research pieces, I would run into the same story. The talk is not being walked. Companies and financial institutions talk a good game when it comes to sustainability, or corporate social responsibility, and DEI, but remain the driving force at the heart of many of the key challenges facing our world, and rather than being on track to solve them, continue to exacerbate them.

Climate change stands at the forefront of these challenges, driven largely by the fossil fuel industry, with the largest 100 fossil fuel companies responsible for over 70% of global greenhouse gas emissions between 1988-2017. Deforestation, primarily for agriculture and logging by corporations, contributes to the loss of 10 million hectares of forest annually, significantly impacting biodiversity and carbon sequestration. In healthcare, pharmaceutical companies have been criticized for prioritizing profits over access, with the United States, for example, spending nearly $3.8 trillion on healthcare in 2019, yet still facing significant disparities in access and outcomes. Financial institutions played a critical role in the 2008 financial crisis, leading to a global economic downturn that resulted in millions losing their jobs and homes.

In my work, I analysed hundreds of funds branded as ‘ESG’, ‘Responsible’ or ‘Sustainable’, and consistently found that they offered negligible improvements in crucial areas, including greenhouse gas emissions, human rights abuses, deforestation, fossil fuel reserves and more. In select cases, the sustainably branded funds would actually appear less sustainable than your average non-sustainably branded fund. At the same time, headlines abounded in financial news about the ‘ESG boom’ and how large swathes of global capital was now ‘invested sustainably’. ‘ESG’ and ‘Sustainable Investing’, although appearing to be positive forces for systemic change, when examined using quality data allowed me to see that under the sheep’s clothing, the wolf remained.

These are some of the headlines, but every day you can find a new instance of corporations prioritising short-term profit over sustainability or social responsibility, often in the face of overwhelming evidence. In 2023, British Petroleum (BP), in light of an unprecedented $28 billion profit, announced their plans to cut their medium-term Scope 3 emissions reduction goals for oil and gas production from 25%-40% to 20%-30%, while increasing investment in oil and gas by $1billion per year. This is despite the fact that oil majors need to cut current production by 35% by 2040 in order to hit UN temperature targets, according to Carbon Tracker. A deeper look shows that less than 1% of the capital expenditure of the big 5 oil and gas companies is going into renewable energy, with over 90% going into further fossil fuel exploration, production and distribution.

Should anyone be surprised? Of course not. As Hannah Duncan explains in Capital Monitor, Shell conducted research in 1988 which highlighted the wide-ranging risks of global warming, acknowledging that by the time it becomes easily detectable, it may be too late to counter it. Despite this, Shell ‘doubled down on oil production’, and is still expanding its oil operations up to and beyond 2030. It is in their interests however, to appear as if they are driving the change. A recent report by InfluenceMap estimates that companies are spending around $750 million each year on climate-related communication activities. We know the role that fossil fuel companies play in the climate crisis, and we know how urgent the need for change is. Every new report from the UN Intergovernmental Panel on Climate Change (IPCC) hammers this point home. We know fundamental change is necessary, but fundamental change like this is not in the interests of the fossil fuel industry. In the meantime, therefore, they play a game of smoke and mirrors, obfuscating the urgent need for systemic change by falsely positioning themselves as already providing solutions.

Nowhere was this clearer than at COP27. The COPs are the UN organised annual conferences at which major decisions on how to address the climate crisis at a global scale are made. Its most notable achievement is the Paris Agreement, a legally binding international UN treaty, made in 2016, which aims to limit the increase in global average temperature to 1.5 degrees above pre-industrial levels. In other words, these conferences are pretty important for large scale climate action. Unfortunately, however, they are not incorruptible. At COP27 in Egypt, the fossil fuel lobby came out in force. Laurence Tubiana, CEO at the European Climate Foundation argued that, “The influence of the fossil fuel industry was found across the board… The Egyptian Presidency has produced a text that clearly protects oil and gas petrostates and the fossil fuel industries.” To illustrate this contradiction, Shell has spent $57 million on oil and gas lobbying since the Paris Agreement. Whilst fossil fuel representatives sat at the highest levels of decision-making discussions at COP27, civil society representatives often found themselves either shut out or priced out of these meetings.

To really change things, you need to change the rules of the game.

The fossil fuel industry will not voluntarily solve the crisis that they have played a fundamental part in creating, and of which they are the prime beneficiaries. If we extract this to a broader point about interests, we can ask, ’If the status quo is in your interest, even if you know that changing it would benefit the common good, would you do it?’. On an individual scale, you might say yes, but scaled up to complex systems, the likelihood of this happening is vanishingly small. The pursuit of these interests is baked into the DNA of market logic. Take the financial system, for example. The guiding principle is not the common good, or the public interest, it is capital generation guided by fiduciary duty – responsibility to shareholders. Although the parameters for how best to achieve this shift based on regulation, public opinion and more, this is essentially the game, and the players have proven that will use any tactic within (and occasionally outside of) the rules in order to pursue it. If neither the rules of the game nor the prize for winning are designed to serve the public interest, then you cannot expect the players to behave any differently, nor should you expect different outcomes. In my work looking under the hood of large companies, I found this time and time again. You cannot rely on the sportsmanship of the players, and you cannot take them at their word. Given the nature of the challenges we face, this amounts to dangerous naivety. To really change things, you need to change the rules of the game.?

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The nature of the beast

ESG, Socially Responsible Investing, and Impact Investing, which are nice ideas and capable of widespread small improvements and focussed instances of positive impact, will always be paddling upstream under their own power against the might of the profit motive.

The scale of the challenges facing our world and the role that companies and investors have played in creating many of them, is clear. What needs to be done to address these challenges is also increasingly apparent. Radical change in the way markets operate is necessary in order to minimise and internalise the negative externalities they create, with climate change being the most immediate example. Yet this is not happening at scale. Within corners of the financial and business ecosystems, genuinely exciting things are happening. I consider the company I worked with to be one of these exciting things, as the data they provide is essential to understanding the positive and negative impact that companies have on people and planet.

Despite small pockets of change, the fundamental rules of the game remain the same. To all intents and purposes, it’s business as usual packaged in recyclable wrapping paper.

I’m not saying that the systemic change isn’t possible in these areas, it just won’t happen voluntarily. It is entirely in the interests of business and finance to project and sometimes even believe that the change will happen voluntarily. If this is the perception, then it draws attention away from the need to mandate change at a regulatory level and positions the markets as a force for good. Whichever way you spin it, however, profit is king in the markets. That is the fundamental design principle, and the rise of ESG, Socially Responsible Investing, and Impact Investing, which are nice ideas and capable of widespread small improvements and focussed instances of positive impact, will always be paddling upstream under their own power against the might of the profit motive.

As I will explore in a later piece, I believe that companies should pursue profit first and foremost. We have long known that markets do not self-regulate and are not immune to failures, therefore correction from the outside is necessary. The ideal state (much simplified), in my view, is that regulatory authorities set the rules of the game, introducing top-down incentives and punishments in order to minimise the negative impact and maximise the positive impact that markets can have. This happens in tandem with an informed consumer landscape who push from the bottom up to demand certain norms and standards are met by the companies who should serve their interests. Within this, markets are free to do what they do best – compete, innovate, create, produce, and seek profit. This is a form of decentralisation which allows the markets to serve the public in a way which is more effective and efficient than any other tool we have available to us.

Regulation is emerging in the space which holds exciting possibilities for these areas, and makes the business case of organisations like Matter even stronger. Nonetheless, progress is glacial. Why? One element of this is the complexity of the task at hand. Free-market economics in combination with globalisation mean the impact that companies and markets have has exploded in reach and interconnectedness. Understanding something like biodiversity impact, for example is immensely complex. How do you understand, measure, standardise, and regulate it? How can you compare the impact of a large-scale livestock farming operation in the UK to a lithium mine in the Democratic Republic of Congo? Beneath every real-world impact a company has, from human and labour rights, to deforestation, to supply chain issues, CO2 emissions and beyond, lies enormous complexity which has so far been largely ignored, with only abstract financial notions of value being considered. Therefore it is necessary for change to be considered. Helping to build datasets in these areas really hammers this point home. However, having thought about it a lot over my time working in sustainable finance, I don’t think it’s necessarily slow. It’s slow by design.

To return to our sporting metaphor, the players themselves have excessive influence over the rules of the game. Those who are served by the status quo have the power to maintain and reinforce it. At the outset, they might not have set the rules of the game. Much of this was done in the 1980s under Reagan and Thatcher, driven by the prevailing economic thinking of the time, but this unwittingly has created positive feedback loops. Beneficial regulatory conditions allowed investors and large companies to grow in size and influence in tandem with the systematic gutting of the state’s role and capacity in society. This creates a regulatory vacuum increasingly filled by those whose importance has grown in society. This leads to further regulation that entrenches their influence and the benefits they receive, whether that be government subsidies, beneficial taxation environments, relaxed lobbying laws, government contracts, and more.

If you task the markets with providing many of the public goods traditionally provided by governments, it’s unsurprising that one of these public functions that they take on is shaping the regulation itself. When we cease to view private markets as one of many tools that we have to serve the public interest, and instead equate the markets with society, they take over. This takeover is not absolute, and it often operates covertly and in the shadows. This positive feedback loop of influence of private interests has been fundamental in creating the challenges we face, whilst simultaneously representing one of the major obstructing forces preventing positive change. If you are wondering why a good idea is not getting traction, and why solutions are not being enacted, look for the shadows, look for the vested interests, and you will understand why.?

The example of the fossil fuel industry at COP27 is a prime example of this, but you can see it everywhere. Business leaders gain huge influence through campaign finance. The financial sector lobbied extensively to shape the regulations responding to the 2008 financial crisis, which was of their making. The shadows of the Koch brothers loom large over U.S. politics. Regulatory authorities around the world are captured by the industries they exist to control. The Public does not have this same power. This excessive influence of vested interests, in the context of the challenges they have created, does not serve the public. Everywhere you look, therefore, we see conflicts of interest between those served by the status quo, and the public who would benefit from its reform.

An objective approach to addressing the challenges we face, based on evidence and the public interest, is not possible, as political processes are captured and public opinion is manipulated.

If we view the two biggest constraining forces for the markets to be regulators and the public, then these interests have a negative impact on both. Not only do they have an excessive influence on the regulation itself, but they can also shape public opinion through direct misinformation efforts, or via politicians to whom they pledge their support. Let’s not forget that the concept of an ‘individual carbon footprint’ was invented by BP in order to distract attention from their ultimate responsibility for driving carbon emissions. An objective approach to addressing the challenges we face, based on evidence and the public interest, is not possible, as political processes are captured and public opinion is manipulated.

Change is slow because the structure of society we live under is not designed to serve the Public Interest. It rests, in an evolved form, upon the fundamental premise that pursuit of self-interest, often in the form of profit, will result in the achievement of collective good. Whilst increasing living standards for many, this logic has also, among many other things, driven global warming, led to the use of sweatshop labour, driven species to the brink of extinction, polluted our rivers and chronically undermined and weakened many of our public services.

And while regulation is required to fundamentally change the rules of the game, this will not happen while the arsonists hold the matches.

Once you begin to understand the nature of the beast, there is no going back.

Once the cracks start to show, you can see them everywhere

Despite all the upside of the role and the company, I recently decided to quit my job.

As my understanding of the systems which underpin financial markets and the ESG boom evolved, it challenged my preconceptions on how change happens, both in terms of how it takes place at a systemic level, and how to individually contribute to that change.

I saw the shadows of vested interests at play which prevent, slow, and co-opt the exciting forces for change that are emerging everywhere. To me, these only emphasise the importance of the company I was working with in the context of the financial system, but also highlighted how little I had previously understood about how change happens (and doesn’t) within complex systems.

Previously, I had thought, and in fact we are constantly taught, that if you are committed to changing something and put in the hard work, then anything is possible. The truth, however, is far more complex. The role had given me the time and the tools to see the shadows hiding beneath the surface and got me thinking - if the challenges we face, like climate change and corporate tax avoidance, can be better understood by examining the interests at play, could this lens be applied more broadly? Can understanding whose interests are being served help us understand the challenges we face, and potentially hold the key to their solution?

Once you start seeing these shadows, they begin to emerge everywhere. What we see on the surface only represents a fraction of the reality of how the world works. This was what I was beginning to discover, through a combination of my work, my studies in Global Development at the University of Copenhagen, and through reading. I was beginning to understand how little I understood.

This, in the end, was what triggered my exit. I needed time to figure things out. I needed to build a theory of change.