The industrial economy is geared towards maximization of wealth. This target has led towards substantial, even amazing, economic growth during the last two centuries. Yet, at the same time this growth has introduced new risks and has caused severe threats and actual damages to the environment and to the social framework.
Some risks are environmental: Global climate change; loss of diversity that decreases resilience; damage to delicate food chains; and land, air and water pollution. Others are societal, such as employment security, growing inequality in income and wealth, pressures related to rapid urbanization, and demographic changes that threaten retirement system.
The focus of our conversation will be to show the roles of financial consumers in helping to mitigate these threats and turn them into opportunities. As an insurance expert, I think that retirement savings hold the key to the solution.
Think about insurance companies — they write the checks after climate-related natural disasters. Therefore, mitigation of those risks is a must for insurers. Retirement and insurance funds manage the largest asset most individuals accumulate during their lifetime. These monies are the major source of long-term investments in the world. Managing them involves great responsibility: When we save for retirement, the money is invested in projects that shape our future, and at the same time are supposed to create the revenue stream needed to finance our retirement.
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It is important to remember that insurers and pension funds are managing our money, and therefore must serve our values. Since environmental and societal risks endanger our survival, we must encourage insurers to use the funds directly to mitigate some of the major threats, such as climate change and insecure employment and retirement arrangements. What is the sense in making other conventional investments, given the level of threat of climate change on our future?
We have the needed funds
Does the insurance and pension industry have sufficient funds that can be the source needed to save humanity? Yes it does! The industry manages a portfolio in the magnitude of $80T (Larger that the annual global GDP). And every year some $7-10T must be reinvested. These enormous amounts are more than enough to help mitigate our most imminent global threats.
Let us focus on climate change: The Stern Report on the impact of climate changes, published in 2005, estimated that an annual investment of 2 percent of global GDP was needed to prevent the consequences of climate changes. At that time this was equivalent to "only" $1.5T, which is a small part of what insurers have to invest annually. Similar projects serving other environmental, social and ethical goals can be treated in a similar way.
So the question is: How can we assure that those funds are invested on behalf of our future rather than in projects that will eventually destroy us?
At present, pension and retirement funds are managed towards the goal of the current paradigm, thereby serving mainly (almost merely) economic goals. In other words: maximization of return on investment. Most investments are currently made in traded (short-term) financial instruments that have daily market valuation rather than in long-term real assets. Moreover, some of the financial instruments create volatility and crises in our financial systems.
A paradigm shift toward a 4D system
We need to replace the economic (short-term) objective with a multi-dimensional target. Many now agree that we must serve a "triple bottom line" (economic, environmental, social) concept. But the recent introduction of sophisticated communication and computer systems, such as mobile tech, has enabled the global public connect while giving them access to a vast array of knowledge. This has transferred much power from the hands of government and big business to the hands of individuals, and created the Era of the Global Person. We therefore suggest adding a fourth dimension to the new dashboard: Consumer (& Citizen) Consciousness. So instead of the triple bottom line approach, we recommend using a 4D system, ESEC = Economical-Social-Environmental-Consumer (& Citizen) Consciousness. Moving from a system where we serve the economy to a system that serves an ESEC dashboard will generate a game change, a paradigm shift!
This will lead towards an enhanced and expanded form of capitalism. Capitalism assumes that each player strives for wealth maximization, which leads to creation of supply and demand curves that automatically determine a set of equilibrium prices. This process leads towards an automatic allocation of all resources as well as all goods and services that we produce. The beauty of the capitalistic system is that the allocation is not only automatic ("the invisible hand"), but also optimal. Changing the definition of wealth and inclusion of additional forms of capital — economic, social, human, natural, etc. — will lead to a new optimum (enabling us to overcome our antiquated accounting system that explains only a small part of the "market value" of firms). Moreover, it will show that the new accounting regulations, mainly the capital adequacy rules of Solvency 2 are diverting funds towards the wrong directions (since they generate a bias towards short-term traded government securities, and against non-governmental and non-traded loans and investments). The main issue, of course, is the definition of the new metrics.
For example, investments of retirement funds would include anti-climate change projects such as renewable energy plants, energy storage systems, better transportation systems, greenhouse gas emissions reductions, etc. It may include new educational systems for engineers, designers, executives, accountants. It may encourage new design frameworks such as Cradle to Cradle and impact job markets. It may even change the retirement system by guaranteeing minimum returns on retirement funds and relieving savers from some dependency on the volatile capital markets.
How can we make it happen?
As a professor I am a dreamer, but I am also very practical. When the Stern report was published I discussed with some of my friends, leaders of the international insurance industry, the challenge of climate change and the needs for channeling investments towards new directions. The industry leaders decided to create a committee to deal with the issue, aided by the Financial Initiative of the UN environmental protection agency (UNEPFI). It took several years to work out a draft of a voluntary PSI treaty – Principles for Sustainable Insurance. This followed the PRI convention that took place for the financial sector sometime earlier. In June 2012, the UN RIO+20 summit on environment and climate change convened in Rio de Janeiro while the signatory process of the PSI treaty took place at the Global Insurance Conference in another part of Rio that same week (I was honored to be a speaker at this event).
Today, about 50 percent of the funds — approximately $40T — are already almost in “our hands.” Why only 50 percent? Mainly due to the inability of US insurers to participate due to legal issues. The main difficulty is regulation. For example, laws in most states say that corporations are obligated to maximize shareholder profit, leaving executives afraid of being sued if they prioritize sustainability projects.
We must encourage and thank the insurers that have committed themselves to manage their business in a sustainable way. We can use our power as conscious consumers to show our appreciation.
Insurers and the UNEPFI committee are still working on the by–laws for the PSI treaty. The main difficulty is the lack of agreeable metrics!
Our purpose is to help develop the new metrics for the 4D ESEC dashboard, to enable us to optimize the allocation of these long-term investments. We can achieve that, if we all unite — all sectors and stakeholders that recognize sustainability as the end goal.
The potential impact of harnessing the large pot of retirement funds towards the 4D system is enormous. The wonderful thing is that the money exists; we simply have to ensure it is invested in the right place. By that, we will be able to ensure the shaping and reshaping of our common future.
To enable us to prosper in a 4D sense, rather than just economically, will require a paradigm shift, our transformation into game-changers.
I believe this will make insurers eventually more important than the banks. This will happen also with the developments of computers and communication, and complementary currencies. The marginal costs of handling large data, transferring and exchanging money and banking services is becoming negligible.
The only remaining true cost is the cost of credit rating and insuring credit risks. This may encourage insurers to work with consumers and make the shift faster.
We have two main challenges:
- First, rallying US insurance companies to join — they are currently not part of this move.
- Second, developing a more sophisticated, multi-dimensional metrics system, the 4-D matrices. The UN secretary general recently declared a goal to have a new dashboard by March 2016. We need to make sure that it will include metrics to guarantee optimal management of funds for the benefit of humanity. We need help in shaping the future dashboard. Join our teams working worldwide in designing what we believe to be the most important dashboard in human history.
Can we do it? Yes, we can! (Note the internationality of this sentence, with "yes" in three languages: English, French and Hebrew)!