Responsible Investment

The three biggest challenges to sustainable finance

March 6, 2012
Image “Pyramids” by Adrian Maidment (CC BY-NC-ND 2.0)
http://www.youtube.com/watch?v=BRyhnWoCb4o

Lloyd Kurtz has occupied a place on the front line of SRI and ESG studies and practices for more than two decades, giving him a uniquely valuable perspective on the issues contributing to — or detracting from — the forward motion of sustainable finance. “The three challenges we are hoping FSinsight will address are (1) governance, (2) sustainability [in the age of climate change] and (3) the problem of overconfidence,” he said.

1. Governance

Governance is a stumbling block for sustainable finance because of the potential for large organizations to engage in ‘regulatory capture’ and ‘jurisdictional arbitrage’.Regulatory capture occurs when “the regulated gain so much influence over the regulator that they effectively control the regulator,” he says. “We have to get governance right,” he says, but because of jurisdictional arbitrage — the ability of companies to use less-strict jurisdictions to shelter problematic governance practices - “the only solution is some type of global [governance] standard.”

2. Global climate change

The second challenge to sustainable finance is global climate — slow but inexorable, and already impacting food production in Asia, says Kurtz. The issue is that the world’s major investors live in wealthy nations that haven’t felt much of the effect of global climate change — there are no water or food shortages in Amsterdam or San Francisco, for example.The nations where climate change is expected to hit hardest do not yet have well-developed markets, nor widely-available investment strategies targeting solutions.“There is no single government policy that can address [climate change] but market solutions can be very valuable,” he says.

3. Overconfidence

The third and greatest challenge is really a ‘people’ challenge: overconfidence. “Overconfidence is a pernicious and scary thing,” he says, referring to behavioral research that indicates the ‘best and brightest’ tend to overestimate their decision-making ability. “If you’ve worked in the investment world, you know that overconfidence is one of your biggest occupational risks,” he says, adding that it is difficult for those who are highly intelligent and effective to hear that “your understanding of the world is incomplete, and the models you use are not a thorough description of what is really happening.”

Solutions, he concludes, must reach across traditional intellectual boundaries and bring together the best thinking from different disciplines.No single approach will be adequate.“Whatever we say about the problems we’re trying to solve in sustainable finance, we can say they aren’t simple.”

References

This video interview was recorded in Amsterdam on 1 February 2012 during the official launch of FSinsight.

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “The three biggest challenges to sustainable finance’ in ESG”, Lloyd Kurtz, www.tias.edu, March 6, 2012.

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Audio transcript (mp3)
Low-res video (mp4)

Author(s)

Lloyd Kurtz
Lecturer of social investing, Haas School of Business

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